We all have that one friend who says they will pay you back, but you know it’s not going to happen. You love them anyway, but it’s simply not in the cards. You also have that one friend who has the money they owe you paid back earlier than you expected, even if you forgot that you ever covered them in the first place. This is life’s introduction to credit scores. Friend #1 has a bad credit score. Friend #2 has a good credit score.
As an introduction, my name is Swetha Misra, Financial Planning Associate here at Pathlight. I am a recent college graduate (just 23 years old), starting my foray into “true” adulthood. There is the excitement that comes with a new job, new apartment, and endless possibilities. Adulthood is also an experience which includes loans, taxes, and bills that are inevitable and need to be carefully managed. I am also looking to further my education and I know this will require me to save up as well as to anticipate taking out loans for my education. Between managing having fun with friends and traveling and work, I am seeing the value of understanding my credit and leveraging that so that I can maintain a well-balanced budget.
Prior to adulthood, my main focuses were around school, work, and creating a plan moving forward past undergraduate. It wasn’t until I started applying for credit cards and looking forward to making large purchases (such as investing into a new car) that I learned the importance of credit scores. My first question was how do I even access my credit score, followed by what does my score mean? How can I improve my score, or how can I avoid lowering my score?
First it is important to distinguish between credit reports and credit scores.
You’re able to access your credit report for free, which is where you can see what information is used to calculate your score. (For example, how many times you made late payments on a credit card.) Though this is useful information, especially when it comes to making sure there are no errors, your credit score is what third parties use to determine how likely you are to pay back loans and in determining interest levels. Your credit score is calculated by these credit reporting companies based on the information that you see on your credit report.
To access your credit report, you can go to https://www.annualcreditreport.com/index.action. Here you can get free credit report a year from each of the three verified companies: Experion, Transunion, and Equifax. Though you can order three at one time, it is suggested to pull one and separate them over the course of the year. Due to change in spending activity, this will also maybe make the report outputs change.
When it comes to Credit Scores, there are different types of scores, each with different weights for how the score is calculated. (https://www.creditrepair.com/blog/credit-repair/how-many-different-types-of-credit-scores-are-there/)
FICO (Score range: 350-850) – Most common scoring model used
- Payment history (35% of score),
- Credit utilization (30% of score),
- Age of accounts (15% of score),
- New credit (10% of score),
- Types of credit being used (10% of score).
Vantage Score (300-850)
- 32% payment history
- 23% credit utilization (amount of credit used/divided by credit limit)
- 5% balances
- 13% depth of credit
- 10% recent credit
- 7% available credit
Insurance Score (200-997)
- This is used by insurance companies to ascertain the likelihood of someone filing an insurance claim.
When I first looked up my credit report, I was startled to see there were a few months where I paid back my credit card bills late. It was never something I really thought about, but now I realize how important it is to make sure all bills are paid on time. If I had consistently been late with payments, I may not have been able to sign a lease for my apartment. A low credit score can prevent you from leasing a car or even having access to low-interest loans. A high credit score, obviously, allows you much more financial flexibility as third-parties have more trust in you.
Maintaining a high credit score has nothing to do with how much money you have, but how reliable you are in monitoring your spending so that you are able to stick to the agreed upon payback plan.
Since your credit score is a vital part of qualifying you to either rent an apartment or purchase a home, you might be interested in our report Top 5 Reasons to Buy vs. Rent a Home which you can download by clicking on the image below
(Click Image or HERE to download)