- 1 Here's how your credit score really gets set
- 1.0.1 No, Tim Cook and Mark Zuckerberg aren't running for president
- 1.0.2 Best Buy says viral photo of $40 packs of water in Houston was 'a big mistake'
- 1.0.3 Harvey could fuel gas prices higher
- 1.0.4 Warren Buffett set to make nearly $12 billion on a single trade
- 1.0.5 Why Fox News is being pulled off the air in Britain
- 1.0.6 Man turns his furniture stores into shelters
- 1.0.7 Harvey flood insurance claims likely to top $10 billion, former FEMA official says
- 1.0.8 Is Japan's economy bouncing back?
- 1.0.9 The post-Harvey struggles for small business
- 1.0.10 These colleges are better than Harvard at making poor kids rich
- 1.0.11 Beverage companies step up to help after Hurricane Harvey
- 1.0.12 Russia's economy minister says US sanctions don't bite
- 1.0.13 Watch this to figure out if you should ditch cable
- 1.0.14 Airbnb waiving fees for evacuees, hosts offering free shelter
- 1.0.15 How glamping became an industry
- 2 “What is a Good Credit Score?” (See What’s Required by 4 Loan Types)
- 3 The Shocking Truth About Your Credit Score — and Which One Really Matters
Here's how your credit score really gets set
No, Tim Cook and Mark Zuckerberg aren't running for president
Harvey could fuel gas prices higher
Warren Buffett set to make nearly $12 billion on a single trade
Why Fox News is being pulled off the air in Britain
Man turns his furniture stores into shelters
Harvey flood insurance claims likely to top $10 billion, former FEMA official says
Is Japan's economy bouncing back?
The post-Harvey struggles for small business
These colleges are better than Harvard at making poor kids rich
Beverage companies step up to help after Hurricane Harvey
Russia's economy minister says US sanctions don't bite
Watch this to figure out if you should ditch cable
Airbnb waiving fees for evacuees, hosts offering free shelter
How glamping became an industry
How’s your credit rating?
Balances on mortgage, auto, and student loans in the U.S. all rose in the first quarter, according to a report from the Federal Reserve Bank of New York this week. Credit card balances were an exception, but card delinquencies are trending up, the Fed noted. That's worrisome. Credit scores have a big impact on consumers' daily lives, often in ways they don't realize.
So we talked with someone who knows all about the different ways credit scores affect us: Liz Weston, author of Your Credit Score, a book about “how to improve the 3-digit number that shapes your financial future,” and a columnist at NerdWallet. Weston spoke about the ways bad credit jacks up prices for basic consumer needs, offered advice about those store credit cards that tempt consumers with zero percent financing on purchases, and debunked a few credit card myths while she was at it.
Here are excerpts of our conversation, edited for clarity and length:
How can bad credit affect our daily lives?
You don’t typically know what you’re missing when you don’t have good credit. T-Mobile said a couple of years ago that half of its customers weren't getting its best deals on phones because of their credit. In a NerdWallet survey, the majority of people knew that landlords use credit scores in making decisions about who to rent to, but many people still didn't know, and they were surprised at how bad credit can increase the size of utility deposits.
People also weren't aware of how their credit score can affect auto insurance premiums. A 2105 Consumer Reports investigation found that sometimes your credit score is more important than your driving record with auto insurers. There’s a connection between a person’s credit score and how much they wind up costing an insurer. Nobody knows why.
Bad credit is one of those spiraling things. Because you lose your job, your credit takes a hit, and all of a sudden, everything gets more expensive, which makes it harder to get by. No wonder people hate credit scores. When they’re bad, they just make things worse. When they’re good, though, they dramatically improve your life. You pay less for insurance, get better cell phone deals, better credit card deals.
So what's a good credit score?
Life starts getting more expensive once your scores slip below the 750 range. That Consumer Reports auto insurance study found that just having "good" scores, rather than excellent ones, could cost you hundreds of dollars in higher premiums each year.
But generally speaking, costs get higher and life gets harder once your scores slip below the 680 range. Below 620, most lenders would consider you "subprime," which makes credit very hard to get and expensive.
Most of us think of ourselves as having just one credit score. That's not true, though, right?
The reality is that you have hundreds of scores. Even if you’re just talking about FICO scores, there are different versions of the scores and different generations of them. [FICO scores, a product of Fair Isaac Corp., are widely used. There are the FICO scores consumers see, and then there are scores used by mortgage companies, auto lenders and bank card providers. Fair Isaac tweaks the formula from time to time, but companies may not always switch to the updated score. The latest version is FICO 9; FICO 8 is more commonly used.]
Wells Fargo, for example, may give me my Bankcard Score 2 from Experian. If I was to get a car, my auto lender might use Auto Score 8 from Equifax. We don’t have control over what scores the three major credit bureaus use [the third is TransUnion], and they might be very different from the one we are actually looking at. Bankcard and Auto Scores go from 250 to 900, for example, whereas the usual FICO score ranges from 300 to 850.
Can we find out what all those other scores are?
You can go to myfico.com and cough up about $60 to get FICO 8’s from each of the three bureaus and see the scores that are most used in mortgage, auto, and credit card lending. You can see your FICO 9’s as well, so you can see the range. The first time I did it, I was blown away—there was a 100-point difference between some of the scores. Which were all good or excellent, of course.
The times I'd recommend buying your scores from myfico.com are when you're about to get an auto loan or lease, and when you want to get a mortgage. The FICO scores that are being used for mortgage decisions are several generations out of date, so the scores you may get from freecreditscore.com, or from bank cards that offer free FICO scores to customers, might not be in the same ballpark as the ones your mortgage lender looks at. Once you have the relevant scores, you can check on myfico.com to see what loan rates to expect. That's particularly important if you're getting a car, because dealerships are notorious for playing games with loan markups.
What are some of the biggest myths about credit scores?
One that keeps coming up is about how carrying a balance is good for your score. I don’t know where that one got started, but it just will not die. There is no advantage to carrying a balance over to the next month.
There is something now called trended data, and some credit card companies report who pays their balance down each month and who doesn't. They discovered that people who pay their balances in full are much less likely to default on a credit line. So Fannie Mae and Freddie Mac told mortgage lenders that if this information is available, they should use it in their decision in a positive way if a borrower is on the margin and might be denied. It could help push that borrower over to an acceptance.
The way Fannie and Freddie instituted this, they said it can be used to help someone, not hurt them. Who knows in the future how the information will be used? If it’s predictive, it’s predictive, and someone is going to want to use it against you.
What are some other common misperceptions?
That checking your credit hurts your score. You really do need to know your credit score or at least be in the right ball park. People think that credit scores are more stable than they are. They actually move around a bit.
Just get a free VantageScore, which many credit websites offer, and monitor it every month. [VantageScores, a measure created by the three major credit reporting bureaus, compete with FICO scores.] If you skip one payment on your credit card, you can knock 100 points off your score. If you have a 780 score and you are 30 days late in paying, that can knock off 100 points. It takes a long time to get those points back. You can really screw things up overnight.
A lot of stores offer zero percent financing for purchases if people open a card. Is having a lot of those cards bad for credit scores?
These are typically not cards with super-high limits, so if you want to close them, it's not going to be a crisis. [If they had high limits and you closed a bunch of them, you could ding your credit score, because you'd be sharply lowering your total available credit limit. Then, if your spending stayed the same or rose, it would look like you were suddenly using a lot more of your credit. Using about 30 percent or more of your limit can hurt your score, by one rule of thumb.]
I think we’ve made people too scared of closing out cards. Every card is something you have to monitor, watch out for fraud, make sure you’re not paying an annual fee. Just in terms of the bandwidth overload of having too many cards, once you’re done with these cards I don’t think there’s a big downside to closing them—as long as you have access to other credit, and you're not closing it right before you’re trying to get another credit line. My concern would be less about having lots of these cards hurting your score and more about a card being taken over and misused. Even if you’re not liable, and it doesn't affect your credit record, it’s a pain.
Any advice about credit for recent college graduates?
Have a credit card and use it, but pay it off in full every month and don’t use more than 30 percent of the credit card limit. And remember that you don’t have to pay interest on your credit card to have a good credit score.
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“What is a Good Credit Score?” (See What’s Required by 4 Loan Types)
The American dream is pretty simple: the pursuit of happiness. You want to better your life for you and your family, and to do that you often need a good credit score. Your credit score not only helps you pay less interest on a mortgage, auto loan, personal loan, or credit card, but it can also help you rent an apartment and get a good job.
We’ve put together a resource to help you understand what a good credit score is and how to improve your score to where you want it to be.
700+ is Generally Considered “Good”
Your credit score is a precise number, but its meaning should be taken in context. FICO score ranges used by lenders and creditors can be roughly organized as follows:
These interpretations aren’t cast in stone. Different lenders may evaluate your FICO score in various ways. What constitutes a “good” score for one purpose might be only “fair” for another. It’s also important you understand exactly which score is being used for a particular purpose.
Different Credit Scores Have Different Ranges
The two most popular scores are FICO, developed by the Fair Isaac Corp., and VantageScore, a joint development of the three national credit reporting companies (CRCs): Equifax, Experian and TransUnion. Both of these scoring systems have a point range of 300 to 850, although the score calculation and interpretation don’t exactly match up.
Consumers actually have three FICO scores, one for each CRC. FICO 8 and VantageScore 3.0 are the most commonly used versions, but other versions can be used for specialized purposes. VantageScore has several secondary point systems with slightly different ranges.
Other alternative credit scoring systems address particular niches and often use different point ranges or letter scores. These include Aire, eCredable AMP, FactorTrust, and more.
How to Check Your Credit Score
It’s easy to check your credit score, and you should do so at least once per year. You can go online to get your credit report and score from a reputable source like myFICO.com — the credit score used in 90% of lending decisions.
You should always check your score before you apply for a loan or make a major purchase using credit. Your FICO score is not free, unless you’re able to get it through a credit card you currently carry or from your financial institution. You can always get a free copy of your credit report from each bureau once annually from annualcreditreport.com, but this does not include your credit score.
Credit Score Needed for 4 Common Loans
Your credit score summarizes your overall credit history into a single number that’s based on the information in your credit report. Basically, your score indicates how you’ve handled credit in the past. Lenders and creditors use your score to decide whether to approve or reject your applications for loans and credit cards.
A good score gives you access to lower interest rates and other favorable terms, including a higher credit line or loan amount, higher cash-back rewards, lower fees, and so forth.
You need to understand how to interpret your credit score, and how its meaning changes depending on the use you have in mind for it. If you find out that your score is less than “good” for a credit card request, for example, you might want to take steps to improve your score before filling out an application form.
Keep in mind that all the scores that follow are approximate, and you may find cases where credit is available at even lower score levels.
Different mortgage types and different lenders have varied requirements, but here are some typical ranges of FICO scores:
- Best interest rates from most lenders: 740+
- Minimum score for conventional loans: 620
- Minimum score for FHA-insured loans: 500 for loans with 10% down, 580 for 3.5% down
- Minimum score for USDA and VA loans: None
Check out our mortgage lender reviews for some of the best offers currently available. Bear in mind that the average credit score among homebuyers in 2016 is 728, and 6.8% have scores less than 620. Quicken Loans is the nation’s largest online lender, and allows you to be pre-approved before shopping for a new home so you know what you can afford beforehand.
Credit scores are a little more lenient for auto loans, because it’s easier to repossess a car than it is to foreclose on a home. These scores can vary by lender.
- Best interest rates for purchasing a car from most lenders: 720+
- Minimum score for conventional auto loans: 640
- Minimum score for lease: 600
- Minimum score from lenders for people with poor credit: 500
If you have poor credit, be sure to check our reviews for car loans. Note that the more money you can put down, the better access you’ll have to an auto loan. Our top partner, Auto Credit Express, specializes in working with bad credit, no credit, and prior bankruptcies and repossessions.
Personal loans are not secured by collateral, and the score approval range varies by institution. Taking out a loan is a great way to consolidate your debts so that you can make just one monthly payment. Here are some average score ranges required:
- Best interest rates from banks and credit unions: 720+
- Minimum credit score from online lenders: 550-600
- Minimum credit score for short-term and payday loans: None
You can find many personal, short-term, and payday loans intended for those with good to poor credit — see our reviews for personal loans for people with bad credit to pick one out yourself. PersonalLoans.com is our top recommended source, and funds can be received as soon as one business day.
Even if you have a bad credit score, you might be able to borrow from $300 to $1,000 via a short-term or payday loan.
A credit card is the most versatile form of credit. Unsecured credit cards do not require a deposit or collateral. Secured cards are backed by funds deposited into a bank account and are best suited for consumers with poor or non-existent credit.
- Best unsecured credit cards: 780+
- Minimum credit score for unsecured card: 600
- Minimum credit score for secured card: None
Don’t let bad credit prevent you from getting a credit card – check out our reviews of secured and unsecured cards. Note that your bank might offer you an unsecured card if you manage your secured card responsibly. Credit One Bank is one of the leading issuers for those with poor credit.
5 Ways to Improve Your Credit Score
No matter what kind of loan or credit you need, you’ll always get a better deal if you raise your credit score. You can improve your credit score by understanding the factors used to calculate it, and then taking action to correct your behaviors in these important areas:
- Payment history: Avoid late or missed payments, and try to pay back more than the minimum amount each month. Avoid bankruptcy, foreclosure, liens, law suits, wage attachments and other derogatories – there is almost always a better option.
- Amount owed: Try not to utilize more than 20% of the available credit on any one account. Reduce the number of accounts with open balances, but do not remove revolving accounts (such as credit cards and home equity lines) even if zero balance.
- Length of history: It’s a good idea to get a credit card early in life — even if it’s secured — in order to build your credit history. Managing your credit wisely over several years will boost your score.
- Credit mix: It helps to have a mix of responsibly handled retail accounts, installment loans, mortgages, finance company accounts and credit cards, especially if you do not have a long credit history.
- New credit: Don’t open too many accounts within a short time period, and try to avoid having too many inquiries made upon your credit history. Keep accounts open, even if you don’t plan to use them again.
For more specific recommendations about improving your credit score, read our best credit-building practices.
A Good Credit Score is Within Your Reach
Your credit score is one of your most important assets, and there’s a lot you can do to protect and improve it. When seeking credit or a loan, remember that your credit score, whether FICO or VantageScore, will be interpreted in light of what you are applying for.
With our tips for how to improve your credit, you should be on your way to the American dream in no time. Good luck!
The Shocking Truth About Your Credit Score — and Which One Really Matters
I swear, at least once a day I see an ad blaring “Click here to check your credit score!”
The number of companies that have apparently calculated my credit score is dizzying.
Some of you may be wondering as well: Why are there so many credit scores? What’s more, which ones actually matter? Is one better than another?
Here’s what you need to know about credit scores and how they affect you and your cash.
Your credit score is a three-digit number based on your payment history, credit utilization, length of credit history, diversity of credit, new credit and other factors.
It’s a measure of how well you’ve managed money in the past , and often used as an indicator of how well you’ll manage money in the future .
Banks and credit card companies use it to determine if they want to lend money to you — and at what rates.
Scores range from 300 to 900, with a score above 650 generally considered “good” by lenders . If your score is lower than that, you may face higher interest rates.
Why Do I Have So Many Credit Scores?
The best-known and most widely used credit scores are FICO scores , created by the Fair Isaac Corporation, a California-based software company.
Although it’s not actually a credit reporting agency, FICO uses information from the three major national credit reporting agencies — Equifax, Experian and TransUnion — to create FICO credit scores .
Of course, Equifax, Experian and TransUnion also have their own credit scores.
There’s also another up-and-coming score called VantageScore. Like FICO, it uses information from the three major reporting agencies to create its scores.
Then there are the “free” credit scores from sites like Credit Karma and Quizzle .
Each organization and credit bureau uses a different scoring model. One might use different types of data, or use the same data but weigh it differently.
There also are different types of scores within each agency depending on the industry — one score for mortgages, one for auto loans and so on. These companies frequently update their formulas, which results in new scores.
“Really, a person can have as many credit scores as there are credit scoring models,” said Thomas Bright, a spokesman for ClearPoint , a nonprofit finance education group.
Keep in mind: All of these companies are for-profit .
So why there are so many different credit scores? The short answer is because someone can make money off them . You’ll typically pay between $15 and $20 to check your credit score.
Motives aside, credit scores are useful and necessary for getting a loan or a credit card.
The score used by lenders varies , but what’s important to remember is the credit score you see online is likely different than the one your lender sees .
For example, Equifax puts this disclaimer on its website: “The Equifax Credit Score is based on an Equifax Credit Score model and is not the same as scores used by third parties to assess your creditworthiness.”
FICO scores are still most commonly used among lenders, but the dozens of scoring formulas result in you having many different FICO scores.
Some lenders even have their own scoring models.
One of the biggest misconceptions about credit scores is the idea that the one we see is the same one lenders see.
This bothers the government’s Consumer Financial Protection Bureau (CFPB) because people pay to see their credit score based on the assumption it’s the same one their lender will use to make financing decisions.
Consumers are often surprised and frustrated when they don’t get the financing terms they expected based on the credit score they paid to see.
“It is likely that many consumers incorrectly believe that the scores they purchase are the same scores used by lenders in evaluating their applications for credit,” CFPB says .
“Literally dozens of different credit models are used by lenders. FICO alone has over 49 credit scoring models.”
Bottom line: The scores that matter are the ones used by your lender , which you can’t access on your own. Other scores are educational and can give you a rough estimate of how you’re doing, but may not match up with the score your lender pulls.
CFPB found 20%-27% of consumers are likely to see a credit score significantly different than the score used by their lender — enough to put them in a different credit-quality category.
“Consumers should avoid relying on scores they purchase as the sole basis for assessing their creditworthiness when making important decisions about obtaining credit,” the bureau says.
“Each consumer should be prepared for the possibility that the score he or she sees is meaningfully different from the score used by a lender.”
What Should I Know About Credit Scores?
So, you have a bunch of different scores and you can’t guess what your credit score will look like to your lender.
It’s still important to regularly check those free or educational scores to get a general sense of what your score looks like. You should also check your credit report for errors and to prevent identity theft.
“Regardless of the credit scoring model used, inaccurate adverse information in a consumer’s file (e.g. unpaid accounts that are not the consumer’s, accounts described as paid late that were paid on time), can hurt that consumer’s credit score,” CFPB reports.
You can check your credit report once every 12 months at AnnualCreditReport.com . Each of the three national credit bureaus is required by federal law to annually provide these reports to you for free, the bureau says.
It’s also important to shop around for credit — even if lenders see the same score, they may offer you different loan terms based on their internal guidelines and other parts of your financial portfolio.
Bright suggests getting familiar with the basics — learn the raw components of a credit score so you know how your actions affect your ability to get credit .
It doesn’t matter which credit score your lender uses, as long as it’s good. Pay your bills on time — and in full — every month. Having good credit can save you thousands of dollars in the long run.
“If you worry about one thing, it should be the due date (on your bills) each month,” Bright said. “Despite how complicated this all might seem at first, simply having a perfect payment history will do wonders for your score.”
Your Turn: How much do you think about your credit score?
Sarah Kuta is an education reporter in Boulder, Colorado, with a penchant for weekend thrifting, furniture refurbishment and good deals. Find her on Twitter: @sarahkuta.