A better credit score can save you tens of thousands of dollars.
It’s one of the biggest factors in living your life on your terms.
Your credit score affects your ability to buy a home, lease a car, rent an apartment, get a loan, and get the right credit card.
Do you know your credit score right now? Have you checked it in the last 12 months?
If not, it’s time to look. It takes 5 minutes.
Credit Scores Vs. Credit Reports
Credit scores and credit reports both mean slightly different things. Let’s go through both.
What is a credit report?
A credit history is a historical record of a borrower’s responsible repayment of debts.
A credit report lists information such as:
- Your full name, address, and Social Security number
- A list of open credit cards
- All of your open loans
- The amount of money owed on all loans
- A history of late and on-time payments on those bills
- Any problems with old loans like defaults even if they’ve been paid.
In other words, it’s your entire history with loans.
If you’ve taken out a few loans and have always paid on time, your report will be kind of boring. You might wonder if anything’s missing. You don’t want an exciting report with flags, late payments, and other problems on it. A boring credit report is a good thing.
All this information gets used by banks and lenders to determine if you’ll get approved for any new loans.
But your credit report doesn’t necessarily include your credit score. They’re technically two different things. Sometime a free credit report will give you your credit history (your credit report) but won’t include the credit score at the same time. Some include it, some don’t.
What is a credit score?
A credit score is a three-digit number, between 300 and 850, calculated based on your credit history. The higher your score, the more likely that lenders expect you to pay back a debt.
There’s several factors that impact your score:
- Payment history. You want to make every payment on time and have a spotless history.
- Amount of debt you already have. Keep this low by only using 30% of your total credit card balance at any time (also called credit utilization).
- Credit age. It’s a good idea to keep your oldest credit card open, this does improve your score slightly.
- Types of credit. If you have different types of loans, that’s a good thing. It shows your more experienced with debt.
- Credit inquiries. If you applied for a lot of new loans recently, that’s a red flag and those credit inquiries will start to lower your score. Don’t apply for smaller loans when you’re getting ready to apply for a big one like a mortgage or car loan.
All these factors get blended into your credit score.
What are good and bad credit scores?
While there are various types of credit scores, FICO and VantageScore are the two most recognized scores in the credit industry.
Here’s a breakdown of each credit score from both agencies:
FICO Credit Scoring
- Credit scores between 300-579 are considered Very Poor.
- Credit scores between 580-669 are considered Fair.
- Credit scores between 670-739 are Good.
- Credit scores between 740-799 are ranked Very Good.
- Any score above 800 is considered Exceptional.
VantageScore Credit Scoring
- Credit scores between 300-499 are ranked Very Poor.
- Credit scores between 500-600 are considered Poor.
- Credit scores between 601-660 are Fair.
- Credit scores falling between 661-780 are Good.
- Credit scores 781-850 are ranked as Excellent.
You basically want a credit score around 700, or higher.
Let’s say I was buying a house. If I had a score of 630, I’d definitely focus on getting above 700 before applying for a mortgage. Doing that work up front will save me a boatload of money as I pay off the mortgage.
The Different Credit Reporting Companies
Credit bureaus are companies that collect and maintain consumer credit information. These companies resell this information to other businesses in the form of a consumer’s credit report.
Before lenders or creditors approve consumers for a loan or line of credit, a credit report is obtained from one of the three major credit report agencies in the United States.
Those three agencies are:
These major credit reporting agencies (CRAs) receive credit-related information from the companies and lenders. The lenders report to CRAs with information about bill payments, late payments, and if an individual has defaulted on a loan.
What do credit reporting agencies do with your information?
Equifax, Experian, and TransUnion sell information to businesses with a valid reason for viewing it.
For example, if a person applies to lease a car, the auto dealership needs to prescreen the applicant and check the credit report. The same goes for credit card companies, mortgage companies, and landlords. Basically anyone that offers loans will check credit reports when they get a loan application.
Banks and other lenders do need your consent though. They can’t check your report randomly if you haven’t applied for a loan.
The Official Free Annual Credit Report and How It Works
Since credit scores and credit reports are crucial for a healthy financial future, federal law states that individuals must get a free copy of their credit report every 12 months.
This service includes a copy from each of the credit report agencies. To obtain a free annual credit report, call Annual Credit Report at 1-877-322-8228 or visit AnnualCreditReport.com.
After obtaining each report, double-check all of the information on each report for accuracy. Check your name, address, Social Security number, and each individual account and loan. Check that all the information on your credit report is accurate and complete.
There’s two types of problems to look for:
- Accounts that were opened in your name without your consent. That’s identity theft.
- Reporting mistakes by banks. They do happen occasionally.
If you find a discrepancy or false information, contact the business issuing the account and the CRA issuing the report.
The Different Options For Getting Free Credit Scores and Reports
Several companies and websites are offering free credit reports and scores.
The more popular credit check websites include:
Remember that nothing is truly free. These companies trade a free credit report to obtain your personal information. Your information could be used to sell products, show you ads, and get you on mailing lists.
There isn’t anything illegal about this activity, just know the cost is your financial privacy.
In the grand scheme, I’m not too worried about it. It’s a small price to pay in order to easily pull my credit report. But if you like to keep your personal information private, stay away from “free” credit reporting services. Use the one at AnnualCreditReport.com instead.
These companies also have credit monitoring services. They’ll keep a watchful eye on charges, opened or closed accounts, security breaches, and even the possibility of identity theft. If they detect something, you’ll get a notification.
Know Your Credit Score to Live a Rich Life
A high credit score opens the door to lots of opportunities.
People with higher credit scores receive better credit terms, this means lower payments and less money paid in interest over time.
A high enough score will get you:
- A great rewards credit card which basically gives you a 2% discount on everything you buy.
- A better mortgage rate which will save you tens of thousands of dollars.
- A better car loan which will save you thousands of dollars.
Increasing your credit score is one of the big wins of personal finance. Everything else gets easier once you have it.