Credit scores and credit reports can feel like really murky waters. Figuring out what a good credit score is can feel daunting, let alone even figuring out how to make yours better. I remember being afraid of checking my credit score for years because I was worried it wasn’t excellent. That and for some reason figuring out the actual steps to find out what it was felt unknown and overwhelming. But don’t worry, everyone has to start from the bottom, and the basic rules are pretty simple to understand. Here’s all the essentials on how to check your credit score.
Why Your Credit Score Matters
Knowing why you should work on your credit score is the first step. It seems like one of those things only your distant future self will need to worry about. That could be true, but it takes years to build your credit score, so the sooner you start, the better. Here are some big reasons why your credit score matters.
It can affect your ability to rent a home
According to NerdWallet, nearly 1 in 2 landlords say that your credit history is one of the top factors in deciding whether or not to accept your lease application. If you have a bad credit score, that could seriously affect where you can live, especially if you’re living in an area where the housing market is more competitive.
You might not be able to buy a home
Unless you’re paying in cash, your credit score can definitely affect whether or not you’ll be able to get a mortgage. It can also affect how much interest you pay, even if you are approved for a home loan.
Credit checks can be used as part of the hiring process
Your credit score, aka the 3 digit number, isn’t necessarily looked at by employers, but your credit history can be. They might look at your history to see whether you’ve been a reliable person when it comes to paying your bills, as that can be an indication of whether you’ll be a reliable employee.
You might not qualify for mobile phone deals
If your credit score is really low, you might be stuck with a pay-as-you-go plan. The best mobile phone deals are usually reserved for those with excellent credit scores.
It can make your car insurance payments higher
This seems like a pretty raw deal, but it looks to be true. Having a low credit score might make it difficult to get good insurance rates, depending on where you live.
You might not qualify for better loans or credit cards
When you’re buying a car or applying for another type of loan, you might end up getting a much higher interest rate than you would if you had a high credit score. You also won’t be approved for credit cards with the lowest fees + interest rates and the best perks.
What Your Credit Score is Based On
Now that we know WHY it matters, what actually determines these mysterious and important three little numbers? Quite a few things actually.
Your payment history for loans and credit cards
It’s really important to pay all of your bills on time and in full. The longer you do this, the more it helps you.
Your credit utilization rate
This only involves your revolving credit (aka credit cards). You take the amount that you owe and divide it by the total limit and that’s how you get your credit utilization rate. So if you have two credit cards with a limit of $5,000 on one and $5,000 on the other, your total limit is $10,000. If you owe $1,500 on one card and $1,500 on the other, you’ve utilized $3,000 — so your credit utilization rate is 30%.
You’ll want to keep your credit utilization rate at 30% or lower (preferably lower. Some experts say lower than 20% or even 10%). One thing to keep in mind is the utilization rate per card. You don’t want to put $3,000 on one card, because then the utilization rate for that card would be 60%, which can also hurt your credit, even if your TOTAL utilization rate isn’t above 30%.
Type, number, and age of credit accounts
The longer you’ve had a credit card that you regularly pay off, the more reliable you look to lenders. It’s also more rewarding to have a mix of different types of credit (fixed loans vs. revolving credit). This is probably going to be a credit card and a student loan or car loan. Before you go out and get that car loan, look into how much it will boost your credit score. It usually isn’t worth it.
Number of inquiries for your credit report
You certainly don’t want to go out and open multiple new accounts all at once. For one, this makes you look desperate. Lenders will wonder why you suddenly need all the money. Two, this will affect the number of inquiries for your credit report. And last, it’ll cause the average age of your credit to go down significantly.
Credit score vs credit report
So what’s the difference between a credit score and a credit report?
The credit SCORE is the 3 digit number, ranging from 300 to 850. The credit report is all the things that go into your credit score. Things like credit cards, number of on-time payments, number of loans, etc. ALL the details go into your credit report.
A credit score is generally considered good if it’s in the range of about 650-720. A score is often considered to be excellent if it’s 720 or above. I’ve seen different opinions on different websites, however.
There are Three Different Credit Scores???
Just when you thought you had this figured out, I tell you that you actually have three different credit scores. This is because there are three different bureaus that gather this information, and they each create your score a little bit differently.
- Experian
- Equifax
- Transunion
They all pretty much use the same information, though sometimes certain landlords or creditors won’t report to all three bureaus.
Where to Check Your Credit Score
Credit card / bank account
A lot of bank accounts and credit cards are doing this fun thing where they give you your updated credit score every so often. We have bank accounts at Capital One and I can regularly check my credit score there.
Mint
You can also see your credit score at Mint.com. Once a month it’ll allow you to get an update and shows you all the different factors going into your credit score. I get excited to refresh it every month. It feels like a game and I get to see if I can bring my score up.
Annualcreditreport.com
Under federal law, you’re entitled to one free credit check with each bureau per year. It’s always a good idea to take advantage of this. If you’ve never checked your reports or it’s been a long time, go ahead and pull all three reports at once. Otherwise, consider pulling one report every four months so that you can take a peek more frequently.
Also bear in mind that this website will give you your credit report, not your credit score (see above). But since it’s so easy to get your credit score from other places these days, it’s hardly worth paying money somewhere to get that info.
What if something on my credit report is wrong?
Maybe you just checked your credit score (good job, friend!) and realized that there was something wrong with it. Before you panic, you should know that you can actually dispute things on your credit report. If there’s a substantial error on your credit report that you get fixed, it can cause your score to go up by 25 points. According to the FTC, 1 in 20 people have substantial errors on their credit report, so it’s definitely worth looking into.
You can find a more detailed explanation of how to dispute something on your credit report here.
How to improve your credit score
It can feel like a long arduous process, but starting now will definitely help in the long term. There are some easy fixes that can improve your credit score right away.
- Keep paying your bills on time
- Pay off your credit card in full each month
- Use less than 30% of the max limit, but preferably less
- Paying off your card weekly or bi-monthly might help with this!
- Dispute incorrect charges
- Don’t apply for credit too frequently
- Ask your credit card company to increase your limit
Over time, you’ll see your credit score gradually increase.
What if I don’t have a credit score at all?
If you don’t have a credit score at all, the best thing you can do is apply for a credit card. For some reason, credit card companies make it easiest to get your first credit card when you’re in college. You can usually see if you’re pre-approved before applying for a credit card. This will give you an idea of whether you’ll be accepted without putting an unnecessary credit check on your credit report.
If you’re NOT in college and have no credit, then a secured card might be the best way to go. This is basically a credit card with training wheels. You start with a deposit, usually around $300 to $500, which acts as your limit. You’ll want to make sure that your payments are reported to credit bureaus so that it actually does improve your credit score.
Now it’s your turn!
Best of luck as you put these steps into action and start improving your credit score! As you’re working on improving your financial literacy and getting in control of your finances, consider bringing your friends along with you. A lot of times personal finance is a taboo topic, but not talking about it is only hurting us! Feel free to share this post with a friend who’s interested in feeling educated and in control about her money too.
