Data breaches of big companies have become so common that you may not even pay attention to them any longer. Nevertheless, the recent news that Experian was breached which exposed the data of tens of millions of consumers does take this to the next level of concern and magnitude. So many people were affected and by a company that is supposed to monitor OUR trustworthiness in managing our debt and borrowing. Experian is one of the big three credit monitoring companies that produce a “credit score” on all of us who have borrowed money or even received a credit card. So let’s take a few blog posts to discuss our credit score: what is it, why should we care, and how we can improve it.
I have mentioned credit scores many times in many different topics because it can affect your financial life in so many ways. Because so few people know what it does or is, let’s review it in more detail.
What is a credit score?
Your credit score is a rating of your creditworthiness or the probability of you paying off future debts based upon your past credit history of managing your credit and paying debts. Credit histories are maintained by three credit bureaus: Equifax, Experian, and TransUnion which provide credit reports and credit scores when requested by lenders. Your credit reports will show all your credit cards and loans, late payments, new credit inquiries, debt collections, and bankruptcies. The most used credit score is the FICO score which produces a numeric score from 300 to 850. VantageScore is used by some lenders and ranges from 501-990 based upon slightly different criteria.
Why your credit score is important
Potential creditors use your credit score to determine how risky it would be to provide you credit and how likely you will pay your debts and on time. It is important because it is used by potential lenders to:
- grant you credit
- determine how good of an interest rate you will be charged
- set your credit limits
- offer credit card rewards and balance transfers
In addition to determining the credit you are offered, your credit rating also may affect a surprising number of other financial areas as well such as auto insurance premiums, telephone contracts, rental applications, and job hunting. Yes, employers are increasingly reviewing applicants’ credit reports (but not credit scores) especially for jobs dealing with finances, executive positions, or confidentiality. Employers must obtain applicant’s written permission, but declining could mean being passed over.
Your credit rating can save you tens of thousands of dollars in interest over a lifetime and have a big impact on your financial future in a variety of ways, so it is important to handle your credit responsibly and maintain a good credit rating. A poor rating could mean paying higher interest rates and insurance premiums, make it harder to rent an apartment, and count against you in job hunting. Once you get your FICO rating above 760, there is no reason to obsess over it. Your credit scores will change from month to month since your credit history, balances, and payments change.
Your three VantageScore or FICO scores may differ slightly between the three credit bureaus because they are free to adjust the criteria the score is based upon and they may have different records reported to them by your creditors. Generally, creditors may use the middle of your three scores. If a couple is applying for a joint loan, both applicants’ scores will be reviewed. If a lender does deny you credit or charge you a rate other than the best, they must tell you the credit score they used and what in your credit report adversely affected their decision.