Your Ultimate Guide to Credit Scores
- How a bad credit score can negatively impact your financial life
- How to fix your credit score.
- The 5 key factors that affect your score.
- The critical difference between a credit report and credit score.
- 3 questions to ask before checking your score.
You know that your credit score is important when applying for a loan, but is checking it yourself really necessary?
Are paid credit services worth it, or can you get what you need without spending your hard-earned money?
And once you get your credit score, what do you do with that information anyway?
If these questions sound familiar, you’re in the right place because you’re about to learn how to check your credit score for free and put that knowledge to good use.
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What is a Credit Score (And Why Does It Matter)?
Your credit score, also called a credit rating, is a three-digit number that’s designed to help lenders understand your credit-worthiness. While every person has different credit scores issued by various companies, the most popular credit scoring company in the United States is Fair Isaac Corp. (FICO).
FICO scores (and most other credit scores) range from a low of 300 to a maximum high score of 850. This number is used by lenders to determine how risky it is to give you a loan. Generally, the higher your score, the more likely you are to pay back your loan on time.
Factors Included in Your Credit Score
Your credit score is based on five factors including:
- Payment history (35%)
- Amount owed (30%)
- Length of credit history (15%)
- New credit requested (10%)
- Types of credit in use (10%)
Your payment history is the most important factor in determining your credit score. The credit scoring company is looking at whether you’ve made all your payments on time. If you have any late payments, it considers how late you were (30, 60, or 90+ days), and whether there were any charge-offs, debt settlements, or accounts that were turned over to collections. Bankruptcies and foreclosures are also factored in.
The second most important factor is how much you currently owe because lenders want to make sure they’re not giving you more credit than you can handle. Someone who has a $10,000 credit limit with a $2,000 balance will rate better than someone with the same credit limit and an $8,000 balance.
Next in priority is the length of your credit history because it shows how long you’ve been using credit. A longer history is better, but only if it’s free from negative marks. Since your credit history only has a 15 percent weighting, those with a short, but clean, history can still achieve a respectable credit score.
Requesting new credit frequently can lower your score. This is particularly true if you’ve made a significant number of requests in a short time period. Lenders might see this as a warning that you’re in financial trouble or are preparing to rack up a lot of debt.
Finally, having a good mix of different types of credit (ex. mortgage, auto loan, and credit cards), will help improve your credit score. Lenders like to see that you’re able to handle both short-term and long-term debt and have a mix of both secured and unsecured credit.
What’s Considered a “Good” Credit Score?
Generally, lenders place you in a category depending on your credit score range.
Bad = 300 to 629
Fair = 630 to 689
Good = 690 to 719
Excellent = 720 to 850
The range you fall into will impact your life in many ways. The most obvious occurs when you need to borrow money. Not only will your credit score impact whether you’re approved for a loan, it also affects the interest rate you’ll have to pay.
Don’t think that’s a big deal? Consider this example:
If a person with excellent credit applied for a 30-year, $200,000 fixed mortgage and was offered a rate of 3.6 percent, he or she would pay approximately $190 per month less than someone with poor credit who was offered the same loan at a 5.2 percent rate.
Over the lifetime of the loan, this seemingly small difference would add up to an astounding $70,000 in additional payments… all because of a difference in credit score!
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Unexpected Ways You’re Impacted by Your Credit Score
Many people don’t realize that your credit score is used for more than just lending decisions. In fact, it can impact many different areas of your life including employment, housing, and insurance.
Almost half of all employers check the credit of potential applicants before offering them a job. Most landlords will check your credit score before renting you a house or apartment. A poor credit score can cause denial of your application, or your landlord might require you to put down a larger deposit.
Most mobile phone deals are contingent on a good credit score, and a poor credit score might prohibit you from opening a mobile phone contract at all. A poor credit score may also result in a significant up-charge on your auto insurance premiums.
When applying for a credit card, scores in the good to excellent range will give you greater access to offers like zero-percent interest, sign-on bonuses, and higher cash-back offers.
Credit Score vs. Credit Report: Understanding the Difference
Many people us the terms “credit score” and “credit report” interchangeably, but this is incorrect.
Think of your credit report as a detailed summary of your entire lifetime of credit use. Your credit score, on the other hand, distills all of this information down to a single number that shows how responsible you are with credit.
A lender can legally request a copy of your credit report any time you complete an application for credit. When you’re applying for a mortgage or auto loan, the lender will usually take the time to go through your entire credit report. For store credit cards and other situations where the lender needs to make a quick decision, they might rely on your score alone.
In many cases, lenders will look at both your credit score and your report before issuing credit.
How to Access Your Credit Report
Under Federal law, you’re entitled to receive a free copy of your credit report from each of the major reporting agencies (Experian®, Equifax®, and TransUnion®) once per year. To access this, you’ll simply need to visit annualcreditreport.com or call 1-877-322-8228 to request your copies.
You’re also entitled to see a free copy of your report within 60 days of being denied credit, if you’ve been a victim of fraud, you believe your report is incorrect, or if you’re on welfare or unemployed and seeking work.
It’s important to review all three of your reports, since there’s a good chance they won’t match. Discrepancies in reporting frequently exist.
Not all lenders report to all three agencies, and it’s possible that one agency could have entered your information incorrectly. Checking each of your credit reports once a year will help you catch any problems and correct them right away.
Note that your free credit report does not include access to your credit score. This is a critical distinction. It tells you all the information that affects your score, but not the score itself, which is a serious shortcoming.
Fortunately, there’s a simple, free solution.
Why Check Your Credit Score?
When you check your credit report, you’re primarily going to be looking for anything that’s not accurate. This could include accounts you didn’t open, late payments or collection notes that aren’t correct, or incorrect reports of foreclosure or bankruptcy. If you find a problem, you’ll want to report it directly to the agency right away. It will take time for the agency to review your complaint, complete any necessary investigation, and make the correction, so the sooner you can get the ball rolling, the better off you’ll be.
The point is that reviewing your credit report is valuable and well worth doing to find errors and get them corrected, but it’s not enough. If you truly want to take control of your finances, you’ll also want to periodically check your credit score. Here are a few of the benefits you’ll receive from doing so.
1. Gain a Solid Understanding of Your Credit Status
Monitoring your credit score gives you the power to make adjustments on the fly and catch anything that doesn’t look right. You’re much better off proactively working on improving your score instead of waiting to find out you have a problem next time you need cash, want to buy a home, finance a vehicle, or start a business. There’s nothing worse than being blindsided by a bad credit score when you’re in a financially vulnerable position and tight on time. It’s smarter to be on top of it and correct any problems before you need to use it.
2. Easily View the Impact of Changes
If you’ve checked your credit score and aren’t happy with what you found out, don’t despair! There are plenty of things you can do to improve your credit rating. That’s the value of being proactive. You can make adjustments by paying your bills on time, paying down as much debt as possible, avoiding opening any new credit accounts, and reporting any errors found on your credit report.
Regularly checking your credit score allows you to easily see if the changes you’re making are translating into score improvements. When your score starts to move in the right direction, you’ll know you’re on the right track. Conversely, if your score starts to go down, you can quickly assess what caused the change and take action to correct it.
3. Spot Signs of Identity Theft
Another advantage to checking your credit score regularly is you can spot potential identity theft right away. If you’re notified that a new account has been opened and you didn’t do it, you’ll be able to investigate the issue immediately. This can make a huge difference in minimizing the damage and getting your finances back on track.
If you don’t monitor your credit score regularly then there’s a risk that you won’t find out your identity has been compromised until multiple accounts have been opened and a large number of financial transactions have occurred. Once this happens, it’s much harder to unwind.
How to Check Your Credit Score for Free
Now that you understand the importance of tracking your credit score, you’re probably wondering how to do it. There are several no-cost options available including online service providers, financial institutions, non-profit consultants, and mortgage lenders.
Online Service Providers
Some online services provide you with free credit scores in exchange for being able to show you offers from lenders and other retailers. If you apply for credit or purchase something through an ad on their site, they get paid by the advertiser. This gives them the ability to earn money without charging you to see your score.
Some of these companies will provide you with copies of both your credit report and your credit score and will even help you file a dispute if you find a problem. When using these sites, you’ll get the information you need without spending money, and it’s possible that you can find a great deal that’s been tailored to meet your specific needs. For many people, this is a win-win. Below are links to some convenient choices:
Thanks to the FICO® Score Open Access Program, more than 170 financial institutions now have the ability to provide their customers with free access to their FICO score. This means that many major credit card companies, banks, and other financial websites will provide you with ongoing access to your score as long as you maintain an active account with them. If one of the above services isn’t convenient then you could try logging into your lender’s website and search to see if you can find access, or you could check your monthly statement to see if they explain where they provide credit score access. Not all lenders provide this service, but it’s worth researching in case your lender does.
Non-Profit Consultants & Mortgage Lenders
Non-profit credit counselors and HUD housing consultants can also provide you with your current credit score and credit reports for free. Mortgage lenders are also required to provide you with all the scores they use to make your lending decision.
Questions to Ask Before Checking Your Credit Score
When looking at your options for obtaining a free credit score, there are some important questions you’ll need to ask.
1. Which Credit Score is Being Used?
The two most popular credit scores are FICO and VantageScore. FICO has been around since 1989 and was the industry standard for many years. Recently, FICO’s dominance has been challenged by relative newcomer VantageScore, which is the product of a collaboration from the three major credit reporting agencies. While both FICO and VantageScore use the same numerical range, and are often similar, they’re not the same.
To further complicate things, you don’t just have a single score from these two agencies. In fact, there are over 50 different credit scores that come from a variety of sources.
While all of these numbers vary, a study by the Consumer Financial Protection Bureau found that there’s a 90 percent correlation among the most commonly-used credit scoring models. This means that if you fall into a certain range with one scoring system, you’ll likely be in the same range with the rest of them.
Since it’s almost impossible to know which score a lender will use, the specifics of which score you monitor don’t really matter that much. Still, you’ll want to know which score you’re looking at so you can make sure you’re checking the same one each time.
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2. Is This a Soft or Hard Inquiry?
A “hard” inquiry, or “hard pull,” occurs when a lender pulls your credit report for the purposes of making a lending decision. You usually must give authorization for them to do so. Hard inquiries can negatively impact your credit score, at least temporarily.
If you apply for multiple credit cards in a short time frame, lenders could see this as a red flag. However, agencies are aware that people often rate-shop before choosing a lender for a major purchase. For this reason, they usually disregard auto, mortgage, or student loan inquiries made in the 30 days prior to scoring. If you make your final decision within 30 days, the inquiries shouldn’t have a major impact. A credit score drop from a hard inquiry will also likely rebound after a short time as long as you don’t apply for any more credit.
“Soft” inquiries, or “soft pulls,” are usually used when you check your own credit score, when employers run a background check, and when credit card companies assess your score before sending you an unsolicited credit card offer. Most credit score reporting and monitoring services use a soft check, which won’t impact your report or score. Before you sign up for a service, however, you’ll want to confirm what kind of check they use.
3. Is the Service Really Free?
Some sites claim to be free, but only offer limited access and then require you to pay for the important stuff. Other “free” offers are actually trials for ongoing paid monitoring services. The trial periods are sometimes as short as two weeks, and if you don’t cancel on time, you’ll find yourself stuck with a bill. If a company offers something for free but requires you to enter a credit card, think twice. Below are two potential free credit score services to consider:
Free vs. Paid Credit Score Services: Which is Better?
Although free credit scores are sufficient for most people, there are some circumstances when it might be worth it to pay for your credit score. Here are a few examples.
1. You Need to Qualify for Something Important
If your score is on the border between two categories, for example between “fair” and “good,” you might want more detail than a free service offers. If you know you need a certain score to qualify for a new mortgage or personal loan and you know which scoring system the lender is going to use, it might be worth it to pay for access to that specific score. This way, you’ll know exactly where you stand and won’t be faced with any unpleasant surprises.
2. Your Credit is Less-Than-Desirable
If you have a low credit score or a lot of problems on your credit report, then it could be worth it to pay for a monthly subscription service. These services can include an analysis of the factors that go into your credit score and make specific recommendations showing you how to improve it. If you log in regularly and follow the site’s advice, the results could pay off tenfold.
3. You’re Concerned Your Identity Has Been Compromised
If you have reason to believe your identity has been compromised or that you have the potential to be a victim of fraud, then you may want to pay for ongoing credit monitoring. You have other free options, like calling the credit agencies and requesting a credit freeze, but some people appreciate the peace of mind that comes from professional monitoring.
If you decide to take this route, make sure you understand exactly what the service covers and whether you have any recourse if something happens while you’re paying for the service.
4. You Don’t Want to See Targeted Ads
Since many of the free credit score websites earn their money by displaying targeted ads for financial products, those who don’t want to be exposed to this might find that they’re better served by using a paid service.
If you do opt for a free service and are considering taking action on one of the ads you see, make sure you proceed with caution. Always do your own independent research when choosing a lender or other financial product. These two free credit score services have a long history so hopefully one will match your needs:
Knowledge is Power: Check Your Credit Score Today
Now that you understand the importance of checking your credit report and your options for doing so, it’s time to take action. Many people avoid looking up their scores because they’re afraid of what they’ll find, but burying your head in the sand won’t make it go away.
Whether you think you have a great credit score, or you’re concerned about where you’re at, now is the time to find out for sure.
Building wealth is about making smart risk vs. reward decisions. The risk of not checking and not knowing clearly outweighs the cost of checking your credit scored, given that it’s free. There’s really no reason not to check.
Knowledge is power, and your financial future starts by knowing where you stand.