Credit: What The Heck Is It?

3 Most Common Question I Get About Money:

  1. How do I start saving more money? And where do I save it?
  2. Should I invest in the stock market?
  3. I don’t know what my credit is like. How do I find out?

Today, I’m going to answer the third question. Now, most commonly when someone asks me this, they’re asking how their credit is effected based on how they use their credit cards. But your credit is decided by far more than that.

I’m going to explain how your credit gets decided and where you can check it.

Your parents or someone in your life has most likely told you that building good credit is critical.

And it is.

SO WHAT IS CREDIT?

Your credit is defined by a variety of factors. These factors are weighed differently so that some matter more than others. Based on the calculation of the various factors, credit reporting agencies give you a credit score. Different ratings agencies decide on their rating scales differently. But the most common scale is rated between 300-850. This is known as the FICO score.

In the Untied States, there are 3 big credit reporting agencies. ALL of them have your information. Even if you don’t have a credit card.

These 3 are…

reports

 (1) Equifax

 (2) Experian

 (3) TransUnion

 

WHAT DETERMINES MY SCORE?

  1. Credit Card Utilization (High Impact)
    • The amount of your total available credit that you’re using on your credit cards.
      • For example, lets say my credit limit is $1,000. I spend $100 this month. My utilization is 10%. Easy, right?
  2. Payment History (High Impact)
    • Hey, are you paying your bills on time? (This can include credit cards, auto loans, student loans, your rent, utilities)
  3. Derogatory Marks (High Impact)
    • The number of collection accounts, bankruptcies, foreclosures, civil judgments or tax liens on your report
      • Hopefully you have none!
  4. Age Of History (Medium Impact)
    • How long have you had credit accounts for?
  5. Total Accounts (Low Impact)
    • How many credit cards or loans do you have right now?
  6. Credit Inquires (Low Impact)
    • How many lenders, possible landlords, employers have asked about your credit?
      • There is a difference in credit inquires called Hard Pulls and Soft Pulls.

Learn more about these factors HERE.

There ya go! You now know how your credit is determined.

WHAT IS A GOOD SCORE?

Credit Score Range Definitions (Sourced from Experian.com)

  • 800 +: Indicates an exceptional FICO Score and is well above the average credit score. Consumers in this range may experience an easy approval process when applying for new credit. Approximately 1% of consumers with a credit score of 800+ are likely to become seriously delinquent in the future.
  • 740 to 799: Indicates a very good FICO Score and is above the average credit score. Consumers in this range may qualify for better interest rates from lenders. Approximately 2% of consumers with a credit score between 740 to 799 are likely to become seriously delinquent in the future.
  • 670 to 739: Indicates a good FICO Score and is in the median credit score range. Consumers in this range are considered an “acceptable” borrower. Approximately 8% of consumers with a credit score between 670 to 739 are likely to become seriously delinquent in the future.
  • 580 to 669: Indicates a fair FICO Score and is below the average credit score. Consumers in this range are considered subprime borrowers and getting credit may be difficult with interest rates that are likely to be much higher. Approximately 28% of consumers with a credit score between 580 to 669 are likely to become seriously delinquent in the future.
  • 579 and lower: Indicates a poor FICO Score and is considered to be poor credit. Consumers may be rejected for credit. Credit card applicants in this range may require a fee or a deposit. Utilities may also require a deposit. A credit score this low could be a result from bankruptcy or other major credit problems. Approximately 61% of consumers with a credit score under 579 are likely to become seriously delinquent in the future.

OK, SO WHY DO I NEED A GOOD SCORE?

This is why:

  • Having good credit shows your ability to pay back debts
    • Whether that be on a credit card, student loan, auto loan, mortgage, etc.
  • Building credit is also evaluated by your potential landlords or employers (to evaluate your ability to repay something)
    • Apartment companies or landlords will more often that not pull your credit when evaluating your potential as a renter
    • Employers frequently check your credit during their background checks on you
      • Companies say they primarily do this to prevent or reduce theft (More Info On that Here)
  • Building good credit will qualify you for lower interest rates over the course of your life saving you TONS of money.

Matt, I don’t have any credit cards, student loans, auto loans, rent payments, or utilities payments in my name. This is useless information to me, dude!

It’s not! Here is why you should still check your credit.

Fake accounts get created all the time. It’s called identity theft. Someone out there can easily be using your name to open accounts. Heck, your own bank could be opening accounts without telling you! If you haven’t heard, Wells Fargo opened millions of UNAUTHORIZED customer accounts without people knowing. They’ve been convicted and owe $185 Million in fines. That happened last week. (Sept 2016) Learn more about that HERE. I personally bank with Wells Fargo. I’m not leaving them. I’ll write a future post on it.

Don’t let someone mess up your credit without you knowing. Check it.

Also- If you’re an authorized user on one of your parents credit cards (even if it’s not in your name), it’s still on your credit report.

FINE, WHERE DO I CHECK IT?

Federally mandated law requires you have access to 3 free credit reports a year. One from all the big 3 companies I mentioned above.

CREDIT REPORTS HERE: https://www.annualcreditreport.com/index.action

You can report fraud, misinformation, and get a good idea of what’s out there for you. This website is 100% safe. I recommend checking one of them every 3-4 months so you have year round coverage of your credit report for free.

BUT WHERE IS MY SCORE?

Your credit report doesn’t give you a score. In the past you had to buy it from one of those 3. But this is 2016, my finance curious friends.

Many banks are beginning to offer the score for free on their websites when you log in. Not all do, but see if your bank does!

WHERE I GET MY SCORE: CREDIT KARMA  —   https://www.creditkarma.com/

You’ve seen a commercial for these guys. Have you thought it was a gimmick? It’s not. I promise you. I’ve been using them for years. They will give you your score AND your credit report from 2 of the 3 FOR FREE. Anytime you want, as much as you want.

(It doesn’t effect your credit because it is a soft pull)

It’s super user-friendly and I’ll go into detail about why I love CreditKarma so much in a future review. CreditKarma is not paying me to say this. I truly love their site.

You can see your credit score each month super easily. (Mine got a nice boost this month as you can see)

my-scofre

Even break out possible scenarios!

my-scofre-w

Super handy!

SO NOW GO CHECK YOURS!

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Comment down below your own thoughts and experiences! Share with your friends. The more views on the site, the more posts I’ll be writing.

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What do you want to see next?

Thanks for reading!

-Matt

 

4 thoughts on “Credit: What The Heck Is It?

  1. Matt,

    Awesome information. Credit has always been a confusing topic to me and few adults in my life have been able to offer a legitimately adequate explanation on how it’s developed, how I can check it, and the many reasons for why it’s important. Thanks for the info. Looking forward to your next post.

    • Thanks, Chase! And thanks for being my first commenter. I was afraid the comments section would be difficult to find. Currently working on that. Glad you liked the post!

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