5 Riveting Things You Probably Didn’t Know About Credit Scores
Credit scores are a significant part of adult life. A person’s credit score can greatly affect how easy or expensive it is to buy a house, finance a car, apply for a credit card, or rent an apartment. Good credit makes all of those things a lot easier. And yet, there are many aspects of credit scores that many people don’t know but would be useful to ensuring that you have a good credit score.
1. Millions of people don’t have a credit score
Don’t be one of them. By default, you don’t have a credit score if you don’t use credit. It’s very important to build your credit history and use credit cards (responsibly) as opposed to cash or debit cards all of the time. In order to have a FICO credit score (the most common credit scoring system), you need to achieve these attributes:
- At least one account opened for more than 6 months
- At least one account that’s been reported to the credit bureaus within the past 6 months
- Have no indication of being deceased on the credit report (this is rare, but mistakes can and sometimes do happen)
2. You have more than one credit score
There isn’t a single source of truth when it comes to credit scores. In fact, there are 3 major credit bureaus: Equifax, Experian, and TransUnion. Each of these bureaus maintains their own score for every consumer that it knows about (so again, you need to have used credit to get on their radar). Therefore, you will have 3 different credit scores, each of which will most likely be slightly different from the other 2. Some lenders look at just 1 score, while others look at 2 or 3 of these scores. Because of this, it may be worth spending the money to know what your score is from all 3 of these credit bureaus. Mortgage lenders will look at all 3 scores and take the middle score to figure out whether you qualify for a loan with what percentage interest.
3. Not using your credit can lower your credit score
Just because you have credit cards open doesn’t mean that you can just stop there. It’s important to keep your credit usage active so that you have a history of making payments on time. This might seem slightly counterintuitive because generally, the lower your credit utilization, the better your credit score. Yet, a 0% credit utilization does not help and may even hurt your credit score. The sweet spot is getting to a very small, but non-zero, utilization rate. It helps to keep even a small credit card balance on one or more cards.
4. Bad credit can be fixed
If you feel your credit score is lower than you want it to be, don’t fret. There are many things you can do to improve your credit score. Negative information is typically dropped from your credit report completely after 7 years, and the impact of those negative marks will have less of an effect on your credit score over time as you generate more recent history of on-time payments. There are some exceptions. Bankruptcies will stay on your credit report for 10 years, and unpaid tax liens will stay on your credit report for 15 years.
For more tips on how to repair your credit, view our 2017 Guide to Credit Repair.
5. Checking your credit doesn’t impact your score
You’ve probably heard that credit inquiries hurt your score, so why are we saying it doesn’t impact your score? There’s actually a difference in types of inquiries. There are “hard” inquiries, which occur when you apply for new credit such as a loan or a credit card. These can impact your score, so it’s best not to, for example, open up too many new credit card accounts at once. Then, there are “soft” inquiries, which occur when you check your own credit or even when a credit card company wants to pre-screen you for a credit card offer. You’re also entitled to a free credit report every year, so not only does it not impact your score, it can be free too!