Credit Scores

Each of us has a unique credit score; somewhere between 300 and 850 is a number that affects the price you pay for things. It’s not a government thing; there are three credit bureaus – Experian, TransUnion, and Equifax. They all do similar things; however, each has a more prevalent region depending on where you live. In the west, Experian tends to be the credit bureau of choice for most lenders.

And that’s really the difference, which lenders report to them. The other difference is the algorithm they use to determine the score. That’s the secret. You’ll likely find that if you received your credit score from all three bureaus, they would be in a relatively close range but would never be exactly the same.

As a consumer in the US, you have the right (and responsibility) to review your credit report once a year on all three bureaus. What you’re looking for is accuracy – if everything on them is true, then it’s just a matter of improving your credit score by other methods.

I know many who think I don’t plan on borrowing money; why does my credit score matter? I thought the same way until I saw it in action. Even though I wasn’t borrowing money, I still have to purchase insurance, and insurance companies base your premium, in part, on your credit score. I knew that but hadn’t really thought about it until I was buying insurance for a boat. The quote came in at X + $900, the actual premium was only X – after they ran my credit score. $900 was a significant savings and only based on my credit.

I’m going to use Experian in my discussion; again, know that the other credit bureaus are similar but may not be exact.

Credit scores are based on numbers – you’ll see them referred to as a FICO score. FICO stands for Fair Isaac Corporation, founded in 1956 by Bill Fair and Earl Isaac as a data analytics company focused primarily on measuring consumer credit risk.

800-850 is considered exceptional; 740-799 is Very Good, 670-739 is Good, 580-669 is Fair, 300-579 is Poor.

If you have no consumer debt, you likely have a Poor Credit Score. This seems counter-intuitive but is really just a reflection on not having any tools to measure you by.

The score comes from five sources: Payment History = 35%; Amount of debt = 30%; Length of Credit History = 15%; and Amount of New Credit + Credit Mix = 10% each.

If your credit score is not where you want it to be – here are some ways to help yourself.

  • Review your reports for accuracy. Make sure all items on your report do belong to you, and the balances are current. You can refer to your balance sheet from Lesson 3 for help.
  • Pay your debt on time – every time. This is worth 35% of your score. Reliably paying on time improves your score more than any other item.
  • Use your credit cards, but don’t over-use them. Keep your balances at no more than 30% of your available credit.
  • If you don’t have much credit, consider applying for Credit Boost. On Experian, that means you can add your utility payments to your account to show your reliability as a consumer. Only do this if you have exceptional payment history. If your history is sketchy, this will hurt you rather than help you.
  • Get better about timely payment of your bills.
  • Don’t apply for unnecessary credit. Hard inquiries on your credit often make you look unreliable.

Like most items in our arsenal, this is a tool. It can be used to cut your interest rates or save you money on insurance products. It can help you buy a car or a house, credit scores need constant monitoring. You do not have to pay for that service, although each credit bureau will try to sell you tools for that purpose; just get signed up for the free service, they share enough information to help you without adding another subscription to your already long list.