There’s no excuse not to, In the old days you could write to the credit agencies and get your report in the mail for free, but now, you can check immediately. Transunion, and Experian, the two main credit reporting agencies, now have apps.
You can also use apps like Credit Karma, Mint, or Capital One’s Credit Wise.
It’s important to know your credit score, know what it means and the types of things that affect it, and check it for errors.
Mistakes are a big deal.
We were a few days away from moving to our new house. We’d been through a Mt. Fuji of paperwork, and we were finally done–I thought.
My banker called me out of my period seven class. “You didn’t tell me you had a home equity loan!”
“I don’t.” I said.
“It says here you do!” The amount wasn’t small, either. Fraud! I thought. Fraud is bad on a regular day–I watched a friend lose a house purchase because a former fiancé used her social security number to open credit cards without her permission.
Then, I knew. “Is the account number?” I rattled off a number from memory. It was one digit lower than my account number.
“Yes,” he said.
It was my dad’s home equity loan–the credit union attached it to my credit report in error. My dad is a financial professional–interest rates were low so he took home equity money and left other money in investments. It was a smart move.
It took a few eleventh-hour phone calls and letters to get it fixed in time for the closing.
“Would that have been a deal breaker for the mortgage?” I asked.
“Yup, would’ve shut you down.” It would’ve changed my credit-to-debt ratio to a space the bank wouldn’t lend to.
Another time, work gave me a credit card. “You can use this for work instead of getting reimbursed.” Somehow it ended up on my credit report. It was paid off every month, but the amount was too large and also affected my credit-to-debt ratio. It tanked my personal credit for months after I had it closed and reported the error to the credit bureau.
The day I paid off my student loans, my credit score dropped 12 points. I looked for a reason. Instead of getting party hat emojis for paying off my giant student loans, The credit app gave me a lectured, “You should leave your longest accounts open.” Average age of accounts factors into your credit rating.
It returned to normal in about six months, but it’s good to know.
There should never be any “guess” in your credit score.
You should know what it is and how to raise it at all times. Pick an app you like, and stay with it. Also, know that free apps like Credit Karma partner with credit cards and accounts, so evaluate all offers carefully.
Things that affect your credit score.
Credit-to-debt ratio
Credit card companies want you in debt paying them interest–that’s a no brainer. But, if you use too much of your available credit, they’ll ding you. The magic number is about 30%. If you’re using below 30% of available credit, you’ll optimize your credit score.
There are two ways to do this–pay off your cards every month or raise your credit card limit. This is fine if you’re doing it strategically–not fine if you might charge it up. Do what’s right for you.
Consistent payments
Missing payments will lower your score. Autopay your bills, especially the ones that report to credit companies, like car loans, mortgages, and credit cards.
Credit inquiries
When you go to get a loan, credit card, or store card, or borrow money in any way, they may do a “hard pull” on your credit–this is a formal check. They will lower your credit score. Several pulls–for example if you go to three dealerships and they each pull your credit or you apply for several credit cards–will affect it by a lot.
Account mix
If you have a mix of accounts, that can affect you favorably. For example, a car loan, mortgage, and a credit card is a mix.
Number of accounts
Too few is bad–it looks like you don’t have credit. Too many is bad. It looks like you could charge it all up and hit the skids at any time. There’s a balance.
Age of Accounts
The longer you’ve had credit, the more stable and possibly better your score will be. Consistent payments on long-standing accounts look good. If you’ve had the same credit cards for ten years, it looks way better than if you’ve closed cards and opened new cards frequently.
What’s a good score anyway?
Equifax lists excellent scores above 800, very good from 740-799, good from 670-739, fair scores are 580 to 669, and anything below 580 is poor.
If you have a poor score, you can improve it by paying down debt, never missing payments, and making sure to avoid hard pulls on your credit whenever you can.
You may have a low score because you’re new to credit or had a financial situation like a bankruptcy in your past. Rebuild by getting a low-limit or secured credit card first, and paying that every single month for the things you need. You can also be added as an authorized user on someone else’s account to get you started.
Why is a good score such a big deal?
You will save a ton of money over your lifetime if you have a high credit score. Your car loans, credit card rates, and mortgage rates will be lower. You’ll get much better offers at much lower rates everywhere you go.
This calculator (credit.com is a site that has offers–you can use the calculator without signing up) estimates the difference you’ll pay over your lifetime in interest charges alone if you have excellent credit versus bad credit. Credit.com estimates the typical person will pay over $279K in interest on credit over a lifetime.
Using the tool at my current (excellent) score verses a poor score for just a few items (mortgage, a fictitious car loan, and the average American credit card load), my lifetime interest load went from $169K to $335K. That’s an extra $166K in interest–almost double.
It’s insane, really. The saddest part is, often the people who are struggling the most are the ones getting the worst offers.
This is why it’s so important to keep tabs on your credit score and keep it as high as possible. Some things will be beyond your control–like the student loan payoff dive.
But, the more you pay attention to your credit score the more you’ll be able to cherry pick the best offers–the ones that put you in an outstanding position to build your finances.
The goal is “no broke teachers.” That’s important.
Your credit is a big part.