Maintaining great credit is a cornerstone of a healthy financial life. But many people just don’t pay attention to their credit until it’s too late. You might get denied for a loan or find that you’ve become the victim of identity theft.
Instead of keeping your credit a mystery it’s easy to look under the hood and see what’s going on. If you don’t understand how your credit scores are calculated and how to boost them, you’re at a serious financial disadvantage.
I interviewed Rod Griffin, a credit expert who’s been with Experian, one of the largest credit reporting agencies, for more than 22 years. Rod is Experian’s Director of Consumer Education and Awareness. He was named the 2016 Educator of the Year by the Institute of Financial Literacy. I love Rod’s mission: To empower consumers to become more financially capable through education and advocacy.
On the Money Girl podcast, Rod and I discuss how consumers can better manage their credit and even raise their scores instantly with a new offering called Experian Boost. We also answer a listener question about building credit and cover a variety of topics, including:
- Who’s a good candidate for Experian Boost and how to sign up for free.
- The best way to prepare your credit ahead of a big purchase, such as a home or car.
- Using a credit fraud alert, a credit freeze, or a credit lock.
- The answer to a listener question about opening and closing a loan to build credit.
- Often-overlooked and money-saving benefits of having good credit.
- The relationship between credit and your auto and home insurance rates.
- Changes in how unpaid and paid medical debt appear on your credit reports.
- Why your credit shouldn’t be a mystery when you apply for a new account.
[Listen to the interview using the embedded audio player or on Apple Podcasts, SoundCloud, Stitcher, and Spotify]
5 Facts About Credit Scores You Should Know
Oftentimes, raising your credit scores is easy if you understand the factors that influence them the most. Use these five tips to improve and maintain excellent credit for life.
1. Credit scores are based on information in your credit reports.
The credit system is based on information that’s reported about you to the nationwide credit agencies: Equifax, Experian, and TransUnion. They maintain data in your file, which is called a credit report. Companies that want to review your credit information must pay one or more credit agencies for all or a portion of your report.
Note that your credit information is never merged with someone else’s, even when you’re married. Spouses each have individual credit reports and scores, which is why it’s so important to build your own credit history.
2. You don’t have just one credit score.
There are actually hundreds of different credit-scoring models.
There are actually hundreds of different credit-scoring models. Some are proprietary systems created by lenders or insurance companies. Some of the most well-known scores come from FICO, which is short for the Fair Isaac Company.
No matter which type or brand of credit score that a company or individual uses to evaluate you, scores are simply a snapshot of your credit information. As new information is added to your credit reports and old information is deleted, your scores will change.
3. Credit affects many aspects of your personal finances.
The higher your credit scores the more likely you are to get credit with the most favorable interest rates, which saves money. But your credit also affects these areas of your financial life:
Leasing an apartment or home: Most property managers and leasing companies check credit as part of the application process. They want to make sure you’re likely to pay rent on time. If you have poor credit your rental application may be denied, or you may have to pay a larger security deposit.
Getting a wireless phone contract: Phone companies check credit when you apply for a new contract to make sure you’ll pay their bill. If you have poor credit you may be charged higher rates, a higher security deposit and not qualify for top-tier wireless plan offers.
Paying for home utilities: Companies that provide services such as water, gas, power and cable TV may require a larger security deposit if you have poor credit.
Insuring your car or home: Insurers in most states use credit when setting rates for car, home, condo, and renters policies. While no state allows credit to be the only factor in setting auto rates, a few states have banned its use completely.
Getting a job: Employers in most states have the right to check your credit reports, with your permission. Although the credit report available to employers is slightly different than the version a potential lender can see, it can still reveal any financial problems you might have.
4. Some factors affect credit scores more than others.
These five factors affect your credit scores:
- Payment history, or whether you pay your credit accounts on time, makes up about 35% of the typical credit score. That’s the highest factor percentage, which means it’s critical to pay bills on time with no exceptions.
- Debt balances make up about 30% of the typical credit score. Credit scoring models analyze the total amount of debt you owe on all your accounts.
- Credit history, or how long you’ve had credit accounts, makes up 15% of a typical credit score. Having a long history of using credit responsibly shows lenders and merchants that they can count on you to continue making payments on time in the future. Scoring models look at both the age of your oldest account and the average age of all your accounts.
- Credit inquiries, or the number of recent applications for new credit accounts, make up about 10% of a typical credit score.
- Credit mix is the number and types of accounts in your name, which accounts for 10% of a typical credit score.
5. You need to know what’s in your credit reports.
Since credit scores are based on your credit reports, it’s critical to know what’s in them. Errors on credit reports are common and can drag down your credit scores without you even knowing.
Keeping an eye on your credit also allows you to spot fraudulent activity, such as accounts you didn’t open, which can devastate your credit. You can sign up at Credit Karma and Credit Sesame to get one or more of your credit reports and credit scores for free. If you see a mistake, get it corrected right away by filing a dispute with the credit agency.
For smart strategies to improve your credit, check out Laura's super affordable online course, Build Better Credit–The Ultimate Credit Score Repair Guide. Click here to enroll at 60% off and get started today.
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