10 Things Everyone Should Know About Credit Scores
The last time I got up in front of a group to talk about my job, no one had questions for me. It was a high school career day a few weeks ago, and the students stared at me blankly as I dropped words like "personal finance," "credit scores" and "debt." I could tell they thought that the topics I write about are boring. Everyone was happy when the bell rang.
Then I spoke to a group of college students and community members, and the atmosphere couldn't have been more different. I went into the talk with a list of things I thought they'd want to hear about -- the event was called "10 Things Everyone Should Know About Credit Scores" -- but as people trickled into the auditorium, I thought I'd gauge their interest in certain topics. The idea was to make people feel comfortable talking to me about credit.
I tried to be casual: "Does anyone have anything specific they'd like me to talk about?" I asked with a smile, hoping maybe one person might say something. The reaction surprised me: People immediately started blurting out questions, and I hadn't even introduced myself yet.
- "How do you build credit? I mean, how does it work?"
- "Is it ever too late to build credit?"
- "How do student loans impact your credit?"
- "How do you get credit when no one wants to give it to you?"
There are way more than just 10 things you should know about credit scores, but here's what I told that group.
- Credit reports and credit scores differ. Credit scores are calculated using the information on your credit reports, which includes details of your credit accounts, how often you apply for credit, debt collection accounts and some public records, among other things.
- Your scores are based on five core factors. Those factors are (in order of importance) payment history, credit utilization, average credit age, account mix and inquiries. You can find a more detailed explanation of each of those factors here.
- You can get your scores and reports for free. You're legally entitled to a free copy of your annual credit report from each of the three major credit reporting agencies: Equifax, Experian and TransUnion. You can get your credit scores for free from various places, including two scores from Credit.com.
- Checking your own score won't hurt it. Only hard inquiries (aka when a lender looks at your credit when you apply for a loan or credit card) have a negative impact on your scores, and the effect is small and temporary.
- There are many different scores and ranges. When you're trying to figure out where you stand or if your credit is improving, make sure you are comparing the exact same score and that you know the range - wherever you're getting the score from should tell you that information. For example, a 750 FICO score is not necessarily equivalent to a 750 in another scoring model.
- Your credit can help you spot fraud. If someone runs up a large credit card bill or takes out credit in your name, it will show up on your credit report and affect your credit score. Watch your score for changes you did not anticipate.
- Your credit score can cost you thousands over a lifetime. A low credit score means you'll probably have to pay higher interest rates on things like credit card balances and mortgages. You can see an estimate of how much your credit will cost you using the lifetime cost of debt calculator.
- Joint accounts affect your credit scores, but there aren't joint scores. If you open a loan or credit card with a partner, the account activity will be reflected on both your credit reports. Joint accounts are different than authorized users, but whenever you share credit, make sure you're aware of who will be responsible and who will be affected if a payment is missed.
- Negative information eventually ages off. Different kinds of negative information will remain on your credit report for different periods (bankruptcy is an exception), but generally, negative information ages off your report and no longer affects your score after seven years.
- Credit scores aren't the only things that matter for lending decisions. A credit score isn't the only thing lenders consider when reviewing applicants. If you have no credit or poor credit, you may be able to secure a loan through an alternative lender, and in some situations, making a personal appeal or giving a lender more context to your credit report can help you access financial products.
As far as the other things the group wanted to know about, here are some answers.
- "How do you build credit? I mean, how does it work?" Focus on those five fundamentals that determine your credit score; mostly, use credit sparingly and make payments on time. It takes years to build good credit, but it's worthwhile to be patient.
- "Is it ever too late to build credit?" No. Your credit score can affect you for a lifetime, so it's always worth trying to improve.
- "How do student loans impact your credit?" Making payments on time is good. Not doing that is very bad.
- "How do you get credit when no one wants to give it to you?" There are a few options: See if you can get a secured card or other credit card designed for people with bad or no credit. Then, spend very little money on it and make the payments on time. You can try piggybacking on someone else's credit by becoming an authorized user, but that's a lot to ask of a friend or family member since they'll be ultimately responsible for any debts you incur. There are also some companies that will help you get loans based on your payment history of rent or utility bills, if that shows a pattern of responsibility.