You Are More Than a Credit Score

Credit history form on a digital tablet
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America is obsessed with credit scores. And the obsession is for good reason. Credit scoring algorithms determine whether or not you will be approved for a mortgage, auto loan, credit card or personal loan. Scores also determine how much you will pay for those products. Having a credit score above 750 can get you the lowest interest rate available, which can save you thousands of dollars. Given how much money is at stake, it makes common sense to understand how scores work and how to have the best score possible.

However, like all obsessions, the credit score obsession is unhealthy. Now that websites enable you to track your score weekly, people actually do track their credit scores weekly. And that is an almost pointless exercise.

But ignoring your credit score completely, and pretending that it doesn't exist, doesn't make sense either. Unless you will never need to borrow money, you should have a good score. And contrary to one of the worst myths out there, you don't need to borrow money and pay interest in order to have a good credit score. You can have an excellent credit score for free.

​There Are Hundreds of Credit Scores

FICO is the most well-known credit score. Because Fannie Mae and Freddie Mac use FICO in mortgage underwriting, it has become the most important score in the market. But there are many different versions of FICO credit scores, which are listed on its website. There are scores for credit card companies, mortgage companies and auto lenders. And there are different versions of each score as well.

In addition, the score is calculated based upon data supplied by the credit bureaus. There are three credit bureaus. If the information in those bureaus is different, you could have different scores.

Free credit score websites like CreditKarma don't provide the FICO score. Instead, they provide the VantageScore, which is similar to FICO but not the same.

And when banks make lending decisions, they usually have their own custom scorecard. A version of the FICO score is probably used, but it isn't the only component of the bank's custom score.

People often come to me, worried about a 10-point change in the free score they received from CreditKarma. I tell them not to worry about such a small change, because lenders are probably not using that score anyway.

​A Few Basic Rules Are All You Need

If you follow just a few simple rules, you will likely have an excellent credit score regardless of the model used.
  1. Always make your payments on time. Nothing harms your score more than a missed payment.
  2. Avoid credit card debt. Make sure you never charge more than 20 percent of your available credit and you pay your balance in full every month.
  3. Repeat items 1 and 2.
  4. Check your credit report at least once a year (at to make sure all of the information is correct. Dispute any incorrect information.
It really isn't more complicated than that. For people who don't like using credit cards for their everyday spending, I have a very simple suggestion. Find a bill that you can pay with a credit card. Your cellphone is a great example. Open a credit card, and sign up for automatic bill payments, linking your credit card. On your credit card, sign up for automatic payment from your checking account. You can then cut up your credit card and remove any temptation of spending.

By doing this, you will ensure that every month you will have a positive item on your credit report. And you will automate all three rules. Your payment will be made on time. Your cellphone bill should never be more than 20 percent of the limit of your credit card. And by paying the balance in full every month, you will never pay a dime of interest.

If you do this, you will end up with an excellent credit score over time. And it is easy.

But You Are More Than Your Score

People often believe that a credit score is enough to get approved. However, people with high credit scores are often rejected.

In addition to a credit score, lenders will also consider your income, debt burden and potentially your time at your job or address. If your total monthly payments are more than 40 percent of your income, you will find it very difficult to get approved for almost any form of credit. If you don't have stability in your income or your job, you could end up being rejected as well. Increasingly, lenders are relying less upon FICO and more upon your job, your income and your cash flow.

How to Get the Best Deal

You shouldn't be afraid of shopping around for the best deal. If you have a good score, you should use that score to get the best rate.

If you are applying for a mortgage, auto loan or student loan refinance, you can apply as many times as you want in a 45-day period. All of those inquiries will only count as one inquiry. You should shop for the best deal and make your lenders compete.

If you already have credit card debt, you shouldn't be afraid to look for a lower rate. You aren't stuck in a high interest rate. When you have a good credit score, you have options. Marketplace lenders are offering dramatically lower interest rates and an easy way to comparison shop. Most marketplace lenders let you check your interest rate and see how much you can borrow without hurting your credit score. You can see a list of these lender at MagnifyMoney, my website.

And I always recommend talking to your local credit union. They are often able to provide some of the best interest rates for any form of borrowing.

Don't Worry, Be Responsible

If you avoid debt, pay your bills on time and have one positive item a month on your credit report (like the cellphone example), you should have no worries. Whenever you need to borrow money, your score should reflect the responsible life that you are living.

Nick Clements is the co-founder of MagnifyMoney, a price comparison and financial education website. You can follow him on Twitter @npclements.
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