There is this funny number in the United States that controls much of your life. These three digits are derived from a secret formula that is blended together to define much of our value in society. While certainly it affects our access to credit, a credit score also has an impact on everything from insurance rates to employment opportunities. A poor score can cost you a ton in interest if you need a new car or want to purchase a house. And what if you have an emergency? Not having the ability to get a loan would be very detrimental.
So it’s time to own it.
A credit score can range from the 300’s up to 850. The current average score is about 700. Anything at or above 800 is exceptional and 620 is usually the starting point for basic credit qualification. Your score is called a FICO score, as it is determined by an algorithm created by Fair Isaac Corporation. Each credit bureau has a small twist in how it calculates the score and they can vary by 20 or so points. Different banks and credit issuers will pull from different bureaus based on who they have a purchase agreement with.
There is no point in getting into all of the nuances that determine the score, but there are a few things you can do to own it.
Pay down some of your debt. An important part of a credit score is the utilization of forms of revolving credit, like credit cards and lines of credit. The ideal is to have balances of no more than 30% of each type of revolving credit you have. 40 – 50% is ok, but getting to the 85%+ mark is really not a good thing and can dramatically affect your score. This is something to even take consideration of when doing balance transfers between cards. Keep the balances low.
Don’t pay it all down though. Showing at least a small balance every month is a good thing. It shows you use revolving credit and the credit bureaus love that. Why? Well the FICO score wasn’t created for your benefit, but for the benefit of creditors. Knowing that you’ll actually use credit and that they will make money is important to them.
Never, ever miss a payment! This the single biggest contributor to destroying a credit score. Just one late payment can have a massive impact. If you do it doesn’t fall off for seven years. A missed payment is pretty much your own little financial nuclear bomb that produces radioactive fallout for a pretty long time.
Revolving credit is more important than having just a loan. While having a basic loan or auto loan can certainly help build your credit score, creditors will attach higher importance to use of credit cards and lines of credit. If you don’t have revolving credit or haven’t had it in a long time and need to build your score banks offer prepaid credit cards and some lenders offer non-prepaid cards with low limits. Beware. They can have fairly high yearly fees. Just as effective is to run down to your local Best Buy, get a store card and buy that pair of cool headphones you have been jonesing for the last 3 months. Store cards can often be much easier to qualify for and build your credit just as well as a regular credit card.
Don’t apply for credit too often. Credit bureaus look very negatively on anyone who applies for a lot of credit. Over 12 times in two years can be very detrimental. Keep applications to a minimum. One important thing to note is that the bureaus do take into account that at times you might be shopping for credit. If several inquiries are done in a short period for a type of credit, it only shows as one credit inquiry. Obviously if you're shopping for a new car you want to find the lowest rate and the credit bureaus know it. Don't hesitate to shop for the best deal.
Get a Credit Karma or WalletHub account. It used to be that getting access to your score involved a bribe to the credit bureaus in the form of money or dealing with some, supposedly, free credit site that did anything they could to start charging you as soon as possible. Credit Karma and WalletHub are both totally free, easy and both have a great app. They aren't perfect as far as reporting your score, but they are still the way to go.
Check your credit report regularly. Your credit report is another thing that used to be hidden away from you. Getting access used to require gearing up with survival gear and trekking deep into the forest in search of the secret scrolls. Congress opened it up back in the early 2000’s and you have access to all 3 credit bureaus now at www.annualcreditreport.com. If you see something wrong or even questionable, do not hesitate to contact the credit bureau. Sometimes just contacting them is all it takes to get it removed.
Never, ever, ever, ever pay someone who claims to be able to clean up your credit! You can do just as much yourself by going through the list above. All of those guys that advertise they can work wonders with your credit on the level with Moses parting the Red Sea are a total scam.
So get busy and own that score! Walking in somewhere to get financed for a house or car and being told “you’re golden” feels pretty damn good.
Lina Martinez has her B.S. in journalism and is a contributor to our politics, life and money pages of Zenruption. She once admitted over drinks to singing "Careless Whisper" in the shower. We are still trying to get her to sing it at karaoke.