Credit scores have the power to impact your financial well-being. They can be used to determine which car you drive, which home you buy and even whether or not you get offered the job of your dreams. And while credit scores used to be accessed primarily by lenders, nowadays it isn’t hard to find your number. Credit card companies, banks and credit unions are making it easy for customers to view their credit scores on demand, and often for free.
Here are 10 things you need to know about your credit score, according to experts.
1. You have to use credit to have a good score. Some people avoid using credit and assume they have a good score if there is no negative activity on their credit report. However, scores for those with little or no credit history tend to be lower, says Mike Sullivan, a personal finance consultant with the nonprofit credit counseling agency Take Charge America. “They punish you if you don’t use credit,” he says.
2. There are many different credit scores. People commonly think they have a single credit score. “While FICO is the one [score] that gets all the headlines, there are dozens of different options out there,” says Sean Stein Smith, an assistant professor of business and economics at Lehman College. That means the free score being provided by the bank may not be the same one used by a lender to approve an application. While FICO scores, named for the Fair Isaac Corporation, originated the concept of the credit score, new models have been developed over the years. For instance, VantageScore is a score created jointly by the three major credit bureaus of Experian, TransUnion and Equifax.
3. Credit scores serve a specific purpose. Sullivan says people often wonder why their credit score doesn’t take into account income, marital status and other factors. That’s because credit scores are intended as a snapshot of how someone manages debt. “It is designed strictly to help lenders understand their risk,” Sullivan says. “That’s all they care about.”
4. Credit applications can drop a score. There are several factors that contribute to a credit score, including the number of inquiries made for new accounts. Filing too many credit applications, also known as hard inquiries or “hard pulls,” can raise red flags for lenders. Brian Bellhorn, marketing director for financial technology firm Fiserv, says that’s something to remember before applying for a store credit card simply to get a discount at checkout. “It’s great for consumers to save 15 percent, but the trade-off is a hard credit pull that’s going to negatively affect their scores,” he says.
5. Checking your score won’t affect it. People can check their score as many times as they like. Credit reviews for informational or marketing purposes are known as soft inquires or “soft pulls” and don’t get calculated into the credit score formula. The same is true for credit checks done for employment purposes or lender advertising.
6. You should check your score regularly. Since there is no danger in reducing your credit score by checking it, Bellhorn recommends reviewing it weekly. A dip in a credit score could alert consumers to potential fraud or credit report errors. “The quicker you catch it, the easier it is to correct it,” Bellhorn says. Free FICO scores are available from the card issuer Discover, while the financial website Credit Karma gives people access to those from VantageScore. Other institutions and websites may offer other credit scores as well.
7. Credit score access is becoming standard practice. It used to be a novelty for a bank or credit card issuer to provide free credit scores, but now it’s a mainstream offering. Discover, Chase and Capital One are just a few companies offering free credit scores. Bellhorn says banks can reap benefits by enabling consumers to check their scores easily. “What we often find with consumers is that if they are actually monitoring credit scores, it makes them more mindful,” he says. Mindfulness may make customers more financially successful, which in turn can lead to more business for the bank.
8. The formulas for calculating scores are similar. While FICO, VantageScore and other companies use proprietary formulas for calculating their scores, each uses a similar model. In general, these scores range from 300 to 850 with higher scores indicating a better credit history. A person’s payment history is usually weighted most heavily, but other factors include debt balances, the percentage of credit lines used and the age of credit accounts. The length of your credit history can make it hard for young adults to have high credit scores. “If you’re a 21- to 22-year-old and you’re doing everything right, your credit may be lower than you think,” Stein Smith says.
9. Credit scores can stand in for character references. Although controversial and restricted in some states, credit scores can be used to determine insurance rates, grant security clearance or inform hiring decisions. “If you have an 850 [score], you’re close to being a saint and if you have a 450 [score], you’re most certainly a sinner,” Sullivan says. “I don’t know if any of that is true,” he adds, but many businesses do operate under the belief that a credit score is an indicator of personal character and reliability.
10. It’s not hard to build good credit. Much has been written about how to increase credit scores, but Sullivan says it isn’t difficult. “If you want to have a high credit score, pay all your debts on time,” he says. He cautions against using credit repair companies that may use shady practices or charge for services you could do yourself. If there is one thing everyone must know about credit scores, it’s that there is no substitute for smart money management that uses debt wisely and pays off balances on time.