Having a good credit score is something that will help you throughout your adult life. Unfortunately, many people don’t understand how credit works, and this can cause more problems than you think. Below we take a look at the top 10 things to know about credit scores to help you better manage your finances:

1. Credit reports are different from credit scores

There is a connection between your credit score and your credit report, but they are not the same. While credit reports document financial history, credit scores are a number that provides a snapshot of your creditworthiness.

A credit report keeps track of your credit applications, the number of accounts you have, the debts you have, as well as any liens and bankruptcies. Basically, everything you’ve done financially is reflected in the credit report.

Credit scores take the financial choices you make and the things that happen and turn that into a number. Things like paying your bills on time will increase your score. If you miss payments and don’t pay at least your minimum monthly payments on your credit card, your score will be lower.

Many things contribute to your credit score, and lenders may only look at this number when considering your credit application. Having bad credit makes it a lot harder to get a mortgage to buy a house. The effort to improve your credit score before buying a house or even buying an apartment will be well worth your time and energy.

2. What does your credit score consist of?

Five main factors contribute to your score. They are:

Your payment history: The most important factor determining your score is your payment history. If you missed payments, this is part of 35% of your score, and it really makes a difference.

Credit Usage: The amount of available credit you use makes up 30% of your score. It is recommended that you do not have more than 30% of your credit limit. While this is all of your credit together, it doesn’t matter if you go way above this figure on one account if you have many other sources of credit.

Account age: How old your credit accounts are is a minor factor, making up about 15% of your score. This makes it better to keep your old accounts even if you don’t plan on using them anymore.

Credit types: The combination of credit types, such as credit cards, car loans, and more, is better than having just one credit type in your report. Different credit types can make up 10% of your credit score.

Credit questions: When you apply for credit, lenders will normally do a hard investigation of your records. This temporarily pushes your score down, accounting for about 10% of your number.

3. Free Reports and Scores

The three major agencies that have data on you must provide you with a copy of your credit report every year. Since there are three agencies, you can do this three times a year, choosing a different agency each time. By doing this, you can pick up on any issues in your report before they cause problems.

It is also possible to get your credit score in a few different places. Your credit card company may provide you with access to your score, or you can go to Credit.com for your score from Experian. For some of the best ways to get your free credit report, Click here.

4. Checking Your Score Doesn’t Lower Your Score

While hard requests on your credit report will lower your score, checking your score isn’t the same. You also don’t get extra hard requests on your account when you apply for the same type of loan from different lenders.

5. Not all scores are the same

The three major credit bureaus — Experian, Transunion, and Equifax — all use different scoring ranges. VantageScore also uses a different range, and while FICO is the same as Transunion, they won’t necessarily give you the same score.

  • VantageScore: 501 – 990
  • FICO: 300 – 850
  • Experian: 360 – 840
  • Transunion: 300 – 850
  • Equifax: 280 – 850

6. Low Credit Scores Can Be Expensive

If you don’t have the best credit score, you’ll pay more in interest and additional fees than someone who does. If you can improve your score, you can save thousands of dollars on the credit you get. Given how important your credit score is when it comes to getting the best mortgage terms, it makes sense to work on improving your scores. There are a few companies that can help, including: Credit Karma and Credit Sesame.

Both companies help you increase your credit scores by providing sound credit advice. You can compare them in the article Credit Karma vs. Credit Sesame. The best thing about these credit enhancement services is that they are free!

7. Credit Scores Are Individual

Even if you are married, with joint accounts and shared credit cards, your credit score will not be shared with your spouse. If your spouse has bad credit, adding them to your credit card shouldn’t directly negatively affect your score.

However, if they share a card or account with you, problems can arise if they don’t pay. If they have a large balance, it can affect your score as it is your account too. If you are going to share an account, it must be clear to everyone who is responsible and what the consequences are of missing payments.

8. Avoiding Fraud

Checking your credit score and getting credit reports will help you spot problems before they have a chance to negatively impact your finances. Checking this information will tell you if you’ve been the victim of identity fraud. If your score drops unexpectedly, someone may be using your information to open an account.

9. Credit Mistakes Don’t Last Forever

If you’ve made mistakes in your credit history, they won’t follow you forever. If there are problems, they will fall out of your report if you make sure you do more of the right things in the future.

Once you’ve spent time solving your credit problems, it’s your job to make sure it stays that way. Maintain a good credit score can be as challenging as the work done to improve it – you have to do your best not to fall into old bad habits.

10. Lenders Look at More Than Just Credit Scores

While your credit score is important for getting the credit you want, lenders take other things into consideration as well. So even if you don’t have a great score, there may be a way around it. Enlisting the lender to explain why your score is low could influence them and help your credit application. Unfortunately, this is less likely to work with larger financial organizations. However, if you are looking for a loan from a credit union or a local bank, they may be more accommodating to your less than good credit score.

Final Thoughts

When you have a strong desire to become a homeowner, having a solid credit score is essential. It takes determination to scratch, claw and do whatever it takes to dig yourself out of a financial hole. Ultimately, your efforts will be rewarded not only with the purchase of a home, but also when you need a loan. By now you should have a much better understanding of the importance of your credit score.

Bill Gassett is a nationally recognized real estate leader who has helped people buy and sell real estate in MetroWest Massachusetts for the past 33 years. He has been one of the top RE/MAX REALTORS® in New England for the past decade. Gassett works for RE/MAX Executive Real Estate in Hopkinton, Massachusetts. In 2018, he was the #1 RE/MAX broker in Massachusetts.

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