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Credit score, shmedit score.
I’ll be honest, I wasn’t too worried about my credit score when I first entered adulthood. I figured it was something I could work on improving later down the road when I got my life together.
Of course, when situations started to come up where my credit score matter not caring about it in the past had some annoying ramifications.
(P.S. If you need your credit score for free, get it here.) Here’s the backstory:
I had two open credit cards when I graduated college in 2011. Both I kept low balances on. My minimum payment was $25 for both cards which should give you some indication of how little I really spent. Besides graduating in 2011, something else significant happened:
I hit a rough patch. At this time, a lot of changes happened at once.
I entered the workforce and moved to a new city miles away from friends and stress triggered a semi-meltdown. The kind of melt-down where if you’re not at work or on the toilet, you’re in bed.
So, naturally, when the notifications were coming to pay those $25 bills, I was too busy burrowing my head under the covers. I didn’t care too much about my bills or my credit score. I was just trying to survive work days.
At least a month passed before I got motivated enough to start navigating “adulthood”. But the past due $25 payments were already showing up on my credit report. Factors from your credit report like late payments are used to calculate your credit score. So… the damage was done.
Here’s why my not caring was lame and why you should always give a damn about your credit report and score:
1. A poor/fair score is expensive.
Thankfully, even with the late payments, my score remained in the high “fair” range and on the verge of “good”. All companies have different credit score requirements, so whether your score is good or not is subjective.
Creditors usually consider:
- 500’s or below – poor
- Very high 500’s to 600’s – average or fair
- 670 to 770 – good
- 770 or above – excelente
Again, these ranges are just a generalization. The highest attainable score is 850. When I applied for my first auto loan, the fair/average score I had got me a terrible interest rate.
I’m talking over 15% APR. (Granted as a novice consumer, I didn’t do much auto loan comparison shopping either. Some shopping around could probably have landed me a lower interest rate than what I settled for.)
It was just bad, all baaaaddd.
According to Bankrate, the average rate for a 36-month auto loan for someone with “good” credit is 4.79%. Here’s a quick cost comparison:
The 4.79% interest rate on a $10,000 auto loan would cost about $700 in interest over the 3 year period. A 15% interest rate would cost almost $2,500 in interest for the same loan amount over the same period of time.
Yes, it’s that serious. And it’s not just auto loans that can be expensive.
It’s mortgages, credit cards, personal loans, and more. Any debt can cost you an arm and a leg if your credit score is not great.
2. A low score can cost you a deposit.
Beside being expensive, if you have poor credit and go to set up utilities in your name you may be asked to put down a deposit. Same thing with a rental. Poor credit can mean you need to fork over a higher security deposit.
Why? A low credit score is a sign to service providers and landlords that you may not be able to pay your bills. A cash deposit is required as collateral to cover loss if you miss payments.
You do get this deposit back if you pay your bills, but I’m sure you’d much rather keep that money in your pocket. Fortunately, this isn’t a problem that I faced with my less-than-perfect credit score.
3. A low score and sketchy credit report can disqualify you for jobs.
When you apply for jobs, some employers will ask to pull your credit score and report to see how responsible you are with money.
Negative hits to your credit report may show that you’re financially irresponsible. If one of your duties is managing cash or finances, you could get overlooked for another candidate that has a better credit history.
Keep in mind — employers can’t pull your credit history without your approval. But if it’s part of their standard hiring process, declining a credit check can make it look like you have something to hide.
4. Scores can’t improve overnight
The last reason you should give a damn about your credit score sooner than later is that it’s not something you can increase overnight. It took me at least a year to improve my credit score.
Missed payments is the most important aspect of your credit history and doesn’t just get removed from your report. Instead, as time goes by and you make on-time payments the late payments have less of an impact on your score.
How Credit Scores Are Calculated
Your credit score is like a grade of your credit reports. Factors from your credit reports are considered to determine your grade. Some factors are more important than others.
I say credit reports and scores plural because there are three credit bureaus, Experian, Equifax, and TransUnion. All three bureaus store credit data about us. Because there are three bureaus, we also have three credit scores. Each of our three credit scores are based on information from each bureau.
This is why if you sign up for a credit monitoring service, you’ll notice that you may get more than one score. One from Experian, Equifax, or TransUnion. There are several scoring methods as well.
One of them is the FICO score model which we talked about above. FICO is still the industry standard and used by most companies to determine creditworthiness.
When I was working on improving my credit score, I signed up for FICO score monitoring because I was interested in the metric that companies were actually using to see if I was creditworthy or not.
The problem with FICO scores are they typically aren’t free. If you go to myFICO.com you have to pay at least $20 to get one score.
However, some credit card issuers like Chase, Bank of America, and American Express are now offering a FICO score with some products. Check there first before investing in FICO score monitoring like I did.
Free Credit Scores and Reports
If you prefer free, you can get free credit scores from sites like Credit Sesame or Credit Karma. The difference between myFICO.com and Credit Sesame is that Credit Sesame uses a different scoring metric called the VantageScore.
VantageScores are not true FICO scores. Sometimes people like to call scores that aren’t really FICO scores, FAKO scores.
Clever, huh? Even though Credit Sesame doesn’t give you a FICO score, reviewing your VantageScore is still a worthwhile tool to track overall credit score improvement. Similar factors are used to compute both FICO and VantageScores including:
- Your payment history
- How much debt you have
- How many inquiries you have on your credit report
- Your public records (bankruptcies, cases, etc.)
So, if your VantageScore is trending upwards, there’s a good chance your FICO score is trending upwards as well. You can always use the free score as a benchmark. Then invest in the FICO score when you’re a year or several months out from making a larger purchase where that number matters, like buying a house.
Don’t be like me and care about your credit score and report at the last minute. It’s just not wise. Monitoring your credit report is also important to stay on top of identity fraud. If someone does try to use your name, it will appear on your credit report and you can address it immediately.
We’re also all entitled to one free credit report a year from the credit bureaus. You can grab your free credit reports to review what’s on them at Annualcreditreport.com.
For more money tips, check out these posts:
- How to Save Money When You’re Broke as Hell
- How to Lower Your Comcast Bill
- 100+ Things to Cut Out to Save Money on Monthly Expenses
- How I Increased Student Loan Payment By 500% on a Humble Salary
- 35-Day Holiday Savings Challenge
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