The Numbers Matter
Remember when freecreditreport.com ran a series of clever musical ads trying to entice you to look in on your credit score? Those ads featured a group of shaggy musicians singing about their regret for not monitoring their credit score. In the debut ad the main singer’s identity had been stolen by a cyber hacker, and the fallout landed him waitering in a restaurant that looked like a intensified version of Joe’s Crab Shack. The commercial led us to believe that if he had only monitored his credit score he could have avoided this fate. If you have no clue what I’m talking about you can watch the video here, it’s actually a very clever and catchy ad. Even though this marketing campaign was ridiculous, it was also incredibly effective. After the commercial debuted in October of 2007 thousands of people signed up to check in on their credit scores, fearful of what might happen if they didn’t. Now I’m not advocating for this type of paranoia. However you should know what your credit score is, what causes it to change, and how you can get both your credit score and credit report (I’ll explain the difference) for free.
The True Cost of Ignorance
The truth of the matter is that your credit score is both an indicator of your current overall financial health, and sometimes viewed as an indicator of your personal character. Most of us know that your credit score can affect the interest rates you are able to get for an auto loan or a mortgage. It is pretty straight forward, the better credit you have (the higher your score) the more likely it is that you will get an advantageous interest rate for any personal loans.
Let’s look a a hypothetical situation pertaining to mortgages that illustrates what I’m talking about.
Let’s say you are looking at a $250,000, 30-year fixed mortgage. If you have a credit score of 620, you are considered a riskier borrower, and the average interest rate a lender will give you is 6.2%. You will be making a monthly payment of principal and interest of $1,527, which amounts to $299,821 of total interest paid over the life of your loan.
If you have a better credit score of 700, you are considered a less risky, good borrower. The average interest rate of a mortgage at this credit score is 4.8%. You can expect to pay $1,313 monthly for a total of $222,689.
You save over $75,000 dollars, all because your credit score is 80 points higher.
Do I have your attention?
There’s More at Stake than Interest Rates
In our time the influence of your credit score is far more reaching than just potential interest rates. Your credit score can affect your ability to rent a condo or apartment. If a landlord chooses to run a background check on you as part of the lease agreement process, a poor credit score indicates a financially unreliable tenant. Smart landlords don’t rent to unreliable tenants. Auto insurance companies adjust their rates based upon an individuals credit score, because they have found a connection between higher scores and safer drivers. Employers in some circumstances can use a credit score to determine whether or not to offer a job to a potential employee. Also if you believe this Forbes.com article, your credit score can even potentially affect your love life.
What you Can do to Boost your Score?
Increasing your credit score is a straightforward process, but before you can do that you need to know what your current score is. There are very good online tools to help you do that. Creditkarma.com is a website that allows you to track your credit score, offers you advice about how to improve your score and manage debt. They are able to offer these services for free because they advertise targeted credit cards on their site, although you never have to sign up for one. Your information is secure, and checking your credit score through creditkarma will not cause your score to go down. If you wish once a year, you can download a free copy of each of your three credit reports at annualcreditreport.com. This is the only site where you can do this. You should NEVER pay to get your credit report. This gets you your credit report—the detailed lists of your credit accounts, debt balances, and payment history — but doesn’t show you your credit score, the number lenders use to evaluate your creditworthiness.
Your credit score is broken down into 6 categories, and here is how you can improve each one, thus improving your overall score:
- Credit Utilization: How much credit are lenders willing to give you, and how much are you utilizing? It is very good if lenders are willing to give you credit (this indicates you can be trusted with it) unless your balances are high. Generally the higher your utilization (the more credit card debt you have) the lower your score. To improve this aspect of your credit score, pay down your debts.
- Payment History: Making you payments on time gives you a good payment history and shows you are a reliable borrower thus boosting your credit score. ALWAYS make your payements on time, rent, credit cards, student loans, utilities. Put your payments on autopilot so you don’t miss them. This is one of the weightiest factors in determining your credit score.
- Age of Credit History: The longer you have had active accounts, the more trustworthy of a borrower you are. This may be the one factor over which you have the least control, to improve your score all you can do is wait. My oldest account is a Macy’s credit card that I opened 5 years ago, even though I never use it I haven’t canceled the card. I keep it active simply because it makes my credit history longer thus helping my credit score. Only close accounts when necessary.
- Total Number of Accounts: Your total number of accounts is a measure of your creditworthiness. Borrowers with more credit accounts typically have better credit scores because more lenders trust them. Don’t go crazy, but it may be wise to open a new credit card for the sake of your score even if you don’t use it.
- Credit Inquiries: Hard credit inquiries are placed on your credit report whenever you apply for credit, like a credit card or loan. To improve your score you want to limit the amount of hard inquires against you. Only apply for credit when necessary.
- Derogatory Marks: Accounts in collections, bankruptcies, civil judgments, and liens are items on your credit report called derogatory marks. To maintain a good credit score you MUST avoid any derogatory marks on your credit report. It can take 7-15 years for a derogatory mark to be cleared from your credit history so steer clear.
Do you know your score? What have you done to improve it? How have you benefitted or been hurt by your current credit score?