Even after nearly a decade of sticking to responsible financial habits, I still get that familiar sinking feeling in the pit of my stomach when I know my credit score is going to be checked.
Way back then, I made all the classic rookie mistakes: Missing credit card payments. Forgetting to pay a hospital bill that ended up in collections. Ignoring a few (okay, dozens of) parking tickets. Going over my credit card limit. Applying for too many cards all at once.
Basically, I was a dumb college kid who had absolutely no idea how important credit is. I thought, no big deal. I’ll pay twice as much next month. Or, after I graduate college I’ll make plenty of money to pay this stuff off. I might have been getting an A in my Advanced Critical Theory in Modernist Literature class, but I was earning a big fat F in the real world.
Eventually I did realize that I’d dug myself into a very deep hole. And so I graduated college with my hard-earned English degree, no practical job prospects and a couple thousand dollars in past-due debt. This, finally, was my big wake-up call.
I was lucky enough to land a decent-paying job soon after graduating. So I spent the next several years methodically paying all of my bills on time, examining my credit reports for inaccuracies and paying my credit card bills off in full each month to boost my score. And of course, I had to pay off all my old debts first. By the time I hit 28, my credit was in pretty good shape. I had a score in the mid-700s and I was able to buy a house with my husband.
The moral of my story is, it took me YEARS to repair the damage I’d done, and I could have avoided it all if I’d treated my credit score with a little respect. Sure, it could have been a lot worse. But I definitely could have saved myself lots of stress, time and money.
Why does your credit score matter?
I know, I know — it’s easy to convince yourself that your credit score doesn’t mean much. And maybe if you ignore it, it’ll go away, right?
But in reality, if you’re smart enough to arm yourself with a good credit score, you’ll have WAY more access and opportunities than you would with a crappy one. A good credit score says something about your character. It means you’re responsible, and that you honor your debts. It means you’re someone who can be trusted.
Who looks at your credit score? Well, more people than you might think. Everyone knows your credit is checked when you apply for a credit card or loan, but it can also be pulled by someone who is considering hiring you or renting you an apartment.
And even though it might seem like it’s way far off in the future, when you decide you’re finally ready to buy a home, a good credit score can literally save you thousands and thousands of dollars each month. (That means you might be able to afford a house with, say, granite countertops, instead of the one next to a set of train tracks.) Typically, a score of 720 or higher is considered “good.”
Your FICO® scores
FICO scores are what most lenders use to evaluate your credit. You actually have 3 FICO scores, 1 for each credit bureau (Experian, TransUnion and Equifax). Each score is based on information that these credit bureaus keep on file about you. And as information about you changes, your FICO score is updated too. It’s all very Big Brother-ish.
In fact, your scores are probably different with each credit bureau, and there could be errors on 1 file that don’t appear on the other 2. It definitely pays to review your full credit reports on a regular basis to make sure nothing fishy is going on. You can get all 3 of your credit reports for free once a year at www.annualcreditreport.com.
However, you have to pay if you want to learn your actual FICO scores. There are a lot of websites that provide this service, but a good place to start is www.myfico.com. It can vary, but here’s how a FICO score typically breaks down:
- 35% payment history
- 30% amounts owed
- 15% lengths of credit history
- 10% types of credit in use
- 10% new credit
And if you really want to over-achieve and get yourself a top-tier FICO score, you’ll need to pay extra close attention to these 2 things:
- Maintaining an active credit profile, meaning you consistently use the credit granted to you AND you pay off your debts on a regular basis. Creditors need to see actual proof that you can manage your credit.
- Maintaining a decent credit utilization ratio, meaning the amount of money you owe creditors versus your overall available credit. Most experts recommend keeping your utilization rate under 30%. (So if you have a total of $10,000 in credit available to you across all of your loans and credit cards, you’d want to keep the amount you actually owe around $3,000.) People with both very low and very high utilization rates have lower FICO scores.