How Does My Credit Score Affect Me?
Your credit score is an important number in your life. Your credit score can determine what kind of mortgage you can get, what type of credit you’re allowed to apply for and these days might even affect your ability to get a job. There are many misconceptions about credit scores: here are a few.
Things You Expect that Don’t Happen
When I get married, we get a joint credit score: Not so. Each person has their own credit score ’til death do you part. However, when you open accounts jointly, that information will be reflected on each of your credit reports, for better or for worse.
My job/income impacts my credit score: Sorry, but making six figures, winning the lottery, or inheriting a fortune will not give you a good credit score. Your net worth and income are not factored into your score.
Paying off credit card debt will boost my credit score 50 points: Depending on how much credit card debt you had, you may see some increase. However, credit card utilization is an important component of your credit score and those with the highest credit scores have about 10% utilization.
Being an authorized user on a credit card will impact my credit score: Co-signing for a credit score can have an effect on your credit score, but unfortunately just being an authorized user won’t change your credit score one point.
I only have one credit score: There are several different credit score providers and each credit bureau provides their own credit score. However, these companies all use the same criteria to judge your credit worthiness and the scores basically fall within the same range of each other (good, ok, or poor).
Checking my credit score will lower my credit score: False. When you check your credit score at sites such as Credit Karma, it’s a soft pull so it won’t lower your credit score at all. Only hard inquiries by lenders impact your credit.
Things You Don’t Expect that Do Happen
If you don’t use your credit cards, your credit score won’t change: In order to have a good credit score, you must have credit available to you and use it responsibly. If you don’t have or use credit, you may have no credit history at all and if you do, your credit score won’t be as good as someone who consistently demonstrates responsible use of credit over time.
Credit bureaus don’t make mistakes: Nearly eight in 10 credit reports contain a serious error or some sort of mistake, according to a survey by the U.S. Public Interest Research Groups. Because many errors can negatively impact your credit score, it’s important to check your credit report regularly and dispute any inaccuracies you find.
If a bill or debt isn’t generally reported to the credit bureaus, missing a payment won’t affect your credit score: Any time you pay a bill late or don’t pay at all, that activity can be reported to the credit bureaus. Different companies have different policies about reporting late payments, but never assume that just because you’ve never seen a particular bill listed on your credit report that it can’t negatively impact your credit score if you don’t pay it.
Your credit score only impacts your ability to get credit or a loan: False. Employers, insurance companies and rental or leasing agencies all check this number. Your credit score can prevent you from getting a job or the apartment you want. In addition, people with bad credit scores pay more for insurance premiums than those with good credit scores.
Having a variety of debt impacts your credit score: This one is true. Auto loans, credit cards, mortgages, and student loans all impact your credit score. In fact, the more variety of debt, the more responsible you appear to lenders (so long as you’re responsible with this debt).
Test Your Credit IQ
A good credit score can save you thousands of dollars on a loan, but many consumers don’t know what makes up that three digit number or have any idea what’s in their credit report. Think you’re credit savvy, take this quiz to see just how smart you really are when it comes to this important aspect of your financial health.
Questions
1. What is the average credit card debt?
a. $5000
b. $7000
c. $8000
d. $10,000
2. Many consumers can save ________ in a lifetime through better credit management.
a. $100,000
b. $1 million
c. $500,000
d. $750,000
3. True or False. Debt to income ratio has no impact on a credit score.
4. What component weighs most on your credit score?
a. Length of credit history
b. Credit utilization
c. Total accounts
d. On-time payment History
5. Closing your oldest account may reduce your credit score because it effects:
a. Credit Utilization
b. Length of credit history
c. On-time payment history
d. All the above
6. True or False: Using your credit cards regularly is better than not using them at all.
7. You can improve your credit score by
a. Closing credit cards you don’t use
b. Not using your credit cards
c. Reviewing your credit report regularly and correcting any errors
d. Not paying your bills on time
8. Do credit inquiries impact your credit score?
a. Yes
b. No
c. It depends
9. In today’s economy, good credit is essential when:
a. Trying to secure a home loan
b. Applying for a job
c. Applying to rent an apartment
d. All of the above
10. True or False. A great credit score is considered anything above 690.
Answers
1. C. $8000. The average consumer has $8,000 in credit card debt. Credit cards can be a slippery slope of spending beyond your means if you aren’t careful. Most consumers don’t realize paying the monthly minimum will keep us in debt for dozens of years.
2. B. $1 million – A good credit score qualifies you for better interest rates on home loans, car loans and student loans. Over the course of a lifetime, these interest fees can really add up.
3. True. Length of credit history, credit utilization, total accounts, on-time payment history and credit inquiries are the only components of a credit score. You can learn more about the impact each of these has at www.creditkarma.com/report.
4. D. On-Time payment history. On average, a person with perfect on-time payment history has a credit score over 700. However, make just one late payment and your credit score can drop 50 points.
5. D. All of the above – Credit utilization, length of credit history and on-time payment history are all important components of a credit score. Having a bad grade in one area can have a huge impact on your credit score.
6. True – Credit card utilization is defined as the total credit card debt you have divided by the total available credit on your credit cards. High credit card utilization can be a warning sign of credit risk. According to Credit Karma consumers with a 0% credit card utilization had a credit score 73 points lower than consumer who had a credit card utilization of 1-20%.
7. C. Credit reports are rich with data and often have a error or two. If you contact credit reporting agencies and have incorrect information removed, you may improve your score. Avoiding credit entirely means you’ll have no credit history, which will may it harder to get a loan.
8. C. It depends. Hard inquiries pulled by lenders do have an impact on your credit score, but soft inquiries don’t. When you pull your credit score simply for information purposes through your written authorization, it is considered a soft inquiry and has no impact on your actual credit score.
9. D. All of the above. Employers and renters are more apt to check your credit file before offering you a job or a place to live. To get your credit in top shape, it’s essential to maintain a low debt to credit ratio.
10. False. That used to be true prior to the recession. Currently, the average American has a credit score that comes in right around 690, but, even a 690 credit score provides no guarantees when it comes to getting a loan. With the current state of the economic climate, banks are much less likely to even lend to good credit consumers and when they do it’s often at a higher price.
Analysis
If you missed 0-2 questions, you know credit. You understand the important of being a smart credit use and likely have a high credit score.
If you missed 3-4 questions, you’re doing ok. You likely have an average credit score and understand the importance of paying bills on time.
If you missed more than 5 questions, chances are your credit is in need of improvement and you should start taking steps towards responsible credit use.
a portfolio for managing your financial life online
Today’s post is from financial expert and Credit Karma CEO Ken Lin. Prior to Credit Karma, Ken built predictive targeting models based on credit data and profitability metrics for Partners First. At the time, Partners First was a top 25 Credit Issuer.
5 favorites – A Web portfolio for managing your financial life online
There are 5 financial pillars that consumers should manage – here’s a quick look at a portfolio of 5 Websites that are up to the task and should be bookmarked as Favorites now. In general, these sites are focused on free tools that allow for anyone to actively manage their financial lives online.
1- Manage your money at www.mint.com – After just a few minutes of set-up, you can access all of your accounts in one place through a single sign-on, track expenses and project your budgeting needs out into the future. Another good option is www.wasabi.com.
2- Manage your credit score at www.creditkarma.com – Credit Karma offers free, unlimited access to your credit score, and useful tools to manage it. Credit is a hugely important component in our lives, whether you’re a student or a homebuyer, your current credit can have effects for 2-7 years into the future. For a full, free credit report, visit annualcreditreport.com.
3- Manage your investments at www.finance.yahoo.com – Yahoo! Finance offers a free resource for managing all of your investments in a single place online. There are other brokerage-specific Websites where you can manage a portfolio of investments, such as www.fidelity.com.
4- Manage your taxes at www.turbotax.com – TurboTax allows users to manage their taxes year-round. It’s amazing what a benefit it can be to have a single place to capture and manage tax information, such as business expenses, IRA contributions and charitable donations, among many other events. Another good option is www.hrblock.com.
5- Manage your insurance at www.insurance.com – Car, health, home, and life insurance options can be vast and complex, so it’s one of the things that many of us put on the backburner. But we shouldn’t, as it’s one of the simplest things we as consumers can do to ensure our financial futures. An insurance company that will actually offer better quotes from its competitors: www.progressive.com.
If you treat each of these 5 pillars of your financial life as equally important, and find sites like those recommended above that allow you to actively manage them, you’ll begin to see improvements that are only achievable with a well-balanced approach. And your financial well-being will become more than just a sum of its 5 parts.
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