With banks holding credit cards and several third parties that handle credit scores, it’s easier than ever before for people to view their credit scores. This gives an edge for everyone – as anyone can get quick access to their credit scores and make financial decisions with more accuracy and speed. This is especially helpful amongst millennials who’s financial profiles are still in their early stages.
But being able to look at your own credit score isn’t quite enough, nor is it all that helpful if all you care about is what the score actually is. There is a whole lot more to credit scores than you can imagine on the surface and knowing the basics of credit can help you in so many ways.
Below are certain facts and things you need to know about credit scores.
You Have Multiple Scores
While many people focus on one main important credit score, it’s foolish to focus on just that one when there are several at play. These other scores vary in range and depend on several factors. Those factors are:
- What scoring model is used. FICO is one you’ve heard no doubt and it’s the one that’s been used the most by lenders. However, there are other scoring models out there like VantageScore, which is growing in popularity.
- Which version of FICO or VantageScore is being used. Both of these companies have various models that they use. Some are older methods, while others are newer. Some even use specific models for financial products.
- Which credit bureau is being used to produce the credit score. There are three major credit bureaus – Experian, Equifax, and TransUnion – that hold your credit score. Each of these companies calculate scores differently, so they’ll all have slightly varying scores for you. Naturally, this information would be provided to banks as well.
Because there are such wide factors affecting this, it’s difficult to say what scores others will see when making approval decisions. That said – it’s not too big of a deal.
Having A Good Score Is Simple
Why we think it’s not that big of a deal is because managing your credit is simpler than what others make it out to be. Really, it comes down to having a small set of good credit habits that you want to be keeping. These habits will then help you maintain a great score.
Some examples of these habits are things like paying bills on time and using less than 30% of your available credit limits. If you can keep it lower – that’s even better. These habits are good regardless of how your score is calculated and by whom. The reason for that is that FICO and VantageScore both have a strong emphasis on having a good payment history and low credit usage when they’re calculating your score.
The only thing to keep in mind is ensuring that you are checking the same score that’s generated by the same credit report.
Dismiss Any Myths About Credit Scores
As soon as money or credit is involved, you’ll find there is a rabbit hole of information that you can dive into. Some of those things are helpful, but a lot of them can be wild, outdated, or absolutely false. These things can hamper your ability to build strong habits that will actually help you with your score.
One of the most common beliefs spread around is the idea that checking your credit score only hurts it. That’s a total myth.
That said, checking your credit score does do something. It generates what’s called a “soft” pull on your credit score. What this means is that your request isn’t visible to potential lenders when they are asking for credit reports, though they are visible to you for a 12 to 24 month period depending on the type. All in all, this sort of thing has no bearing at all on your score.
However there is also a “hard” pull, which does affect your score. This normally stems from things like you applying for a loan or landlords are requesting to scrutinize your credit score.
These things do affect your credit reports though they’re temporary and can only knock down your score by a few points.
Another misconception is that your utility bills and cell phone plans will boost your credit.
While there is truth that paying bills is good, those bills in particular don’t affect your score unless you forget to pay them. It’s for this reason why closing accounts after moving to a new location is crucial.
It’s highly possible for the bills to stay in your name and build up over time before being sent to collections. That will damage your credit if it does that.
To prevent those things from happening, you can check your detailed credit reports to make sure everything is good. Also remember that you’re entitled to one free report every year from each of major three credit bureaus.
Don’t Apply For Credit If You Don’t Need It
Credit shouldn’t be gotten just to have it. Though many people push for that whole idea, it’s not a wise financial decision. Credit should be used strategically, but also with extreme caution too. Even if you can afford to take on more debt right now, it’s easy to get in too deep and hamper your score overall.
Remember that there are several factors that are at work here. Not just paying bills on time, but the various models also put a lot of weight on the mixture of debts, as well as how many accounts you have. That said, these play a small role in comparison to the usage and paying bills on time.
The point is most millennials, no doubt, have a student debt. Paying that back or paying back an auto loan on time is more than enough to maintain a decent score.
Always Be Cautious
The final thing to note is to be cautious about money to an extent. It’s easy to get wrapped up into credit cards when they offer rewards or other incentives. While these are nice, they’re temporary.
On top of that, many banks usually offer an increase to loan caps over time. You want to exercise caution and think things over before accepting. After all, it’s easy for folks to increase the limit, as well as their spending, rather than trying to maintain their spending even after the increase.
Keeping these principles in mind will help you know more about the credit world and be able to take advantage of it.