Quick credit quiz: Did you know that you have more than one credit score?
If you’re like 62% of Americans, then the answer is no. According to an annual study by the Consumer Federation of America and VantageScore© Solutions, despite 60% of Americans rating their knowledge of credit scores as “good” or “excellent,” many are still in the dark about basic credit score information.
However, given the importance of credit scores in our lives, you can’t afford not to know the facts. So, to help build awareness, we’ve rounded up the answers to 19 of the most important questions you need to ask about credit scores.
1. What is a Credit Score?
A credit score is a number, usually from 300 to 850. It is used by lenders to help measure the credit risk of an individual.
Technically, an individual’s credit score shows the relative chance that the person will default on any debt within the next one to two years
2. Who Determines Credit Scores?
Credit scores are often calculated by three main agencies: Equifax, TransUnion, and Experian (this is why you have multiple credit scores). However, while your credit score may vary slightly between these agencies, it will usually be in the same credit range. A score from any one of these agencies can typically function on its own as your credit score.
3. What Are Credit Scores Used For?
Credit scores are used for approving credit applications and determining rates on credit products such as credit cards, auto loans, and mortgages. Landlords, utility and cable companies may also use credit scores to see how much of a deposit they will require from you, and car dealerships use them for determining the parameters of leases and purchases
4. What Are FICO© and VantageScore©?
FICO© and VantageScore© are the most common credit scoring models which are used to calculate credit scores. They should not be confused with the credit agencies above. FICO©, historically, was the first public developer of credit scores–– so much so that “FICO© score” and “credit score” have often been used interchangeably, think Kleenex© and facial tissue. However, in recent years, VantageScore© has become increasingly popular.
5. What’s a Credit Report?
Credit reports are in-depth records of your credit history, including the types of accounts, when they were open and closed, and details on payment history. The data within your credit report is then used to calculate your credit scores..
6. What Is a “Good” Credit Score?
There is no single definition of a “Good” credit score because all lenders have different score requirements, and even use different credit agencies as discussed above However, this is one common range that is a useful guide:
- 800 to 850: Excellent
- 740 to 799: Very Good
- 670 to 739: Good
- 580 to 669: Subprime
- 300 to 579: Poor
7. What Is the Average Credit Score?
According to Experian, the average U.S. VantageScore® in 2019 was 682. The most recent figures from Experian also have 34.8% of Americans with a subprime credit score, and FICO© reports that 21.8% of the population has a score above 800.
8. How Are Credit Scores Calculated?
Credit scores are determined by five main components. In order of importance they are:
- Payment history. This refers to late or missed payments and is the most important factor for your credit report. Always pay balance minimums on time.
- Credit utilization. This is the amount of your available credit you have used. Many recommend keeping this below 30%, but there is no golden number. Lower is better. If you’re looking for credit score improvement start by trying to reduce your utilization by 10%.
- Length of credit history. The more history you have to show for your credit, the less unknown risk there is for lenders. Having more than 10 years of credit history will greatly help your credit score.
- Inquiries and new credit. Every time you apply for a new type of loan or credit limit increase, you have what’s called a “hard inquiry” on your credit report. Too many of these at one time will hurt your score.
- Account types. This is the mix of loans you have. Typically, it’s best to diversify, so a combination of mortgage, auto loans, and credit cards is best.
9. How Do I Check My Credit Score?
There are lots of ways to obtain your credit score information: your credit card company or bank, a free third-party service, or buying it direct from a service like FICO©. Obtaining free credit score information is increasingly common and is accurate enough if you need to quickly know your score for an application. If you want an in-depth understanding of your score, paid services will often provide a full report. Checking your credit score to make sure you’re on track is an important step to improve your credit. While they will not provide your credit score, we recommend that you get your free credit reports annually from AnnualCreditReport.com to ensure that all accounts listed on your report are accurate.
10. Does It Hurt My Credit Score to Check It?
No. While hard inquiries like new loans may lower your credit score, checking your own score is what’s known as a “soft” inquiry, as you’re not applying for a loan. Checking your own score doesn’t affect your score negatively and is actually encouraged to make sure you know what’s going on.
11. How Do I Avoid Getting Penalized by Hard Inquiries?
The best rule here is to avoid getting too many inquiries in a short period of time. Hard inquiries stay on your credit report for 2 years but have minimal impact after 1 year (FICO© scores only consider inquires within the last year).However, an exception to this is if you are “shopping around,” and apply for different loans in a two-week period. Typically, credit agencies will understand this behavior and will view multiple inquires as a single inquiry. .
12. Should I Close My Old Accounts?
Sometimes when people access their credit report, they instinctively feel the need to “clean it up” by closing old and unused accounts. However, this may actually hurt your score, as it diminishes both your credit history length and can raise your credit utilization ratio. If an account isn’t delinquent or has any outstanding balance, consider leaving it open.
13. Can My Credit Report Have Errors?
Yes. Despite their importance, credit reports can unfortunately have errors. A study by the Federal Trade Commission found that 5% of all consumers had an error on at least 1 of their credit reports, such as duplicate debts, inactive accounts, or incorrect current balances––all of which could negatively affect your score. The Consumer Financial Protection Bureau (CFPB) put together a simple checklist to determine if your information is accurate.
14. How Do I Fix My Credit Report?
If you do find discrepancies on your report, you’ll want to report them to each of the three credit agencies as soon as possible. To make this process easier, the CFPB offers a guide for how to correct your report. An important thing to note is that many corrections require original documentation to support your claim, so make sure to have receipts if you’ve paid off any debt you’re disputing. You will also need a government-issued ID, and one copy of a utility bill, bank or insurance statement.
15. Why Don’t I Have a Credit Score?
If you are a new graduate or someone who has never had a credit card, student or car loan, you may not have a credit score. While this doesn’t reflect negatively on you, it may also prevent you from accessing certain forms of credit, as lenders may want to know more about who they’re lending to first. Not to fret, it typically only takes individuals about six months to get their first credit score after they open their first credit account
16. What Are Joint Accounts and Authorized Users?
Authorized users are when one individual allows another to piggyback off their account, whereby the authorized user has power to make purchases under the parent account, while the parent account holder is ultimately responsible for paying back the debt. This is a great way to build credit and is typically done between parents and their children. A joint account is typical among spouses for things like mortgages or credit cards and can decrease the risk for an application being denied if one of the individuals has a low credit score.
17. Does It Cost Me to Have a Lower Credit Score?
Yes. Lower credit scores imply a higher risk to a lender. Generally, the riskier a loan is considered, the more the borrower will have to pay in the form of interest. This can be extremely costly depending on the asset and can mean a double-digit difference in the annual percentage rate.
18. Are Credit Scores the Only Factor for Loan Decisions?
No. A source of income, available collateral, and in some cases personal appeals explaining situations, are all considered. Credit scores are the quick non-nuanced ways for lenders to evaluate borrowers.
19. How Do I Build Credit With a Bad Score?
If you’re looking to build credit from the ground up, you should first start with cleaning up your credit report. Start with bringing any delinquent accounts current and make on-time payments on all of your debts, every month. Next you can look to correct any mistakes on your report. From there you want to maintain a low credit utilization ratio. As your score recovers, you may in time apply for credit limit increases, and open new accounts to diversify your credit report. If your credit score is below 600 and these goals are still difficult, consider applying for a secured card A secured card helps to mitigate the risk by requiring a deposit when the card is opened, that the lender uses as collateral. If you have the option, consider having a family member add you as an authorized user on their credit card.
Armed with the above credit score information, you should be equipped to handle any situation that may arise with your credit score. Remember to keep in mind the factors that determine your credit score, how to request your credit score and report, and what score you’re aiming for.
