Unless you are independently wealthy, your credit score is more important than you think. Even if you don’t need or use credit, you should at least be using Credit Cards for security and cash back. Additionally you can receive bigger discounts on home and auto insurance with good credit.
Why is Credit Important?
As mentioned with good credit you can enjoy the following benefits:
- Credit Cards – Everyone should have one as these provide cash back on every purchase, security from fraud and additional cardholder benefits.
- Home and Auto Insurance – Some factors on your credit reflect your Insurance Score which is used to determine your insurance premium.
- Renting – Many commercial and individual realtors rely on your credit check when choosing tenants and a good score can increase your odds.
- Low Interest Borrowing – When you do need to borrow for a car or house, you will get the most competitive rates with good credit.
What are Credit Scores?
A credit score is an overall rating of your entire credit report and is a single indicator of your creditworthiness. The score is not a decide-all factor and a lender may approve a loan for someone with a lower score after a full review depending on their credit report.
There are 2 scores you will hear about and 3 major reporting agencies. These score can change daily and vary based on the agency used. Lenders may use one or more of the scores or agencies. There is also a major difference in the 2 scores (more below).
This is the score used by the majority of lenders. This is not straightforward at all as there are countless different versions of FICO scores used based on the agency and company requesting the score. A comprehensive list of FICO scores and which agencies use them can be found here:
The current version is FICO 8 and FICO 9 the future version; however, many lenders are still not even using FICO 8 yet. Currently, the only version of FICO you can get for free is FICO 8.
This score is rarely used by lenders and heavily used by consumer credit (free credit report) providers such as CreditKarma, WalletHub and NerdWallet. There is only 4 versions of this score with version 3 being the current one and 4 the future version. This score is more generous than most FICO scores and is usually 50-100 points higher than the FICO used by your lenders.
How do I Monitor my Credit and Score?
Fraud and erroneous information can end up on your credit and you don’t want to find out about it when your applying for that new credit card or car. Today it is easier than ever to monitor your credit and you can do it right from an app on your phone.
VantageScores, while not used by many lenders, still reports about the same information which makes it good for monitoring credit changes; since your FICO can not be retrieved as frequently. Credit Karma provides scores from 2 agencies but only updates weekly, while WalletHub can provide daily updates on credit changes. Both Discover and Free Credit Score update monthly, or on your next login, so you should only check these before applying for credit for the most recent results.
Update: The best service for viewing your credit report is Experian.
|Credit Karma||VantageScore 3||TransUnion, Equifax||Weekly|
Note: none of the above will hurt your credit or show up on your credit report.
Keep in mind that the goal is not to monitor your credit score (since the one your lender will use is probably different) but to monitor your credit report and changes.
How do I Improve my Credit Score?
If you are not applying for a car, loan, house, etc. you do not need to anything special except make sure you have a credit card and keep it in good standing (this way you have a credit history and available credit).
- Always pay all credit accounts on time no matter what the cost.
- Never let a non-credit account or bill end up in collections/on your credit.
These and all negative marks will stay on your report for 7 years and cause major damage. Now lets move on to the good stuff.
- Don’t close your old credit cards with no annual fees. Setup auto-pay for the minimum payment and attach a monthly charge under $15 to it.
- Open new credit cards with no annual fees and leave them open. This will increase your total credit availability, decrease credit utilization and increase credit length.
Everyone should have and use a credit card whenever possible. For more information about credit cards, read this article:
If you are planning on applying for new credit card, an auto or personal loan, you will want to understand all the factors that effect your credit and know how to prepare for the the application.
Payment History & Negative Remarks
As mentioned above, this weighs in very heavy and last 7 years. You may not be able to do much about these but if you have negative remarks that will be removed soon, you should wait til they are gone before applying for a large loan if possible.
The more late payments and the more recent the bigger they will hurt. It is highly recommended enabling auto-pay to avoid these from ever happening. If you can’t pay your bill, call your creditor before hand and try to work out a later payment date acceptable with them so your credit is not effected.
If you have Paid Collections or Medical Collections that you can’t get removed you can attempt to seek a creditor using FICO 9 (Wells Fargo) or VantageScore 4 (none known). Both of these newer models weigh paid collections and medical collections much lower.
Credit & Debt Utilization
Second to above, your credit utilization weighs in very heavy, about 35%. This is how much you owe across all your accounts vs how much credit you have available across all your credit cards. Pay off all your credit cards and pay down your loans as much as you can before applying.
This is looked at with both your Credit Card utilization and also with your total balances (excluding mortgages). Credit Card utilization is the most important and counts negatively if it is too much. Always keep your total Credit Card utilization below 30% (that means 29% or less). You should also try to keep all individual cards below 30%. For a premium score, individual and total balances should be below 10%.
Credit Age & New Accounts
This is not weighed as heavily, but the longer your report, the better. The age of your credit (average length of open accounts) can only be increased by letting time pass. However, you can avoid opening new accounts. Not only does this reduce your average credit age, but also shows up as a new account (1-2 years old).
FICO 8 and 9 looks at the last 12 months while VantageScore 3 looks at the last 24 months. Having too many new accounts is a sign of risk to lenders so the its best to plan out your credit applications and make sure you are only applying for what you need.
When you apply for credit it shows up as a hard inquiry (that your credit was pulled in review for a credit application). This shows that you have recently applied for new credit and can be a sign of risk. These inquiries usually stick around for 2 years, so avoid applying for credit right before that big application.
This is basically an agreement with lenders so that other lenders know when you apply for new credit. Other things can cause hard pulls such as utility, phone and internet service providers. This usually shows up as a utility pull and not a bank; however, should still be avoided when possible.
Some lenders let you apply for multiple cards (usually up to 2) with a single hard pull; however, your credit profile must be strong enough to justify getting 2 new lines of credit at one time and usually results in an auto-decline on the second card requiring you to call in. Only do this if you know what you are doing.
Account Diversity & Total Accounts
The more accounts you have and wider variety of accounts will improve your credit. This shows that you have experience managing multiple accounts of different types. There is not much you can do to improve this with out taking on new debt, which is not something you should do before applying for a large loan.