Are You Keeping An Eye on Your Credit Score?
Maybe you’ve heard of the Equifax hack that happened recently? Over 140 million Americans have had their data compromised by the hack of of one of the three Credit Reporting Bureaus.
If you’re not sure if you’ve been hacked, the first thing to do would be check out if your data has been compromised. You can do that here.
There are a lot of great checklists on what to do if your security has been compromised. Check out this article from CNET for a more thorough list.
But I thought it might be a good time to talk about just why it’s important to know what your credit score is and to monitor it yourself throughout the year.
“A credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of an individual. A credit score is primarily based on a credit report information typically sourced from credit bureaus.
Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. Lenders also use credit scores to determine which customers are likely to bring in the most revenue. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system.”
So… let’s break that down.
Your credit score is based on a couple of different factors. Though, it can sometimes seem like a pretty mysterious number, it’s not that hard to figure out why your credit score is what it is.
The utilization of the credit you have available to you -OR- your debt to credit ratio
For sake of ease, let’s say you have three credit cards with limits of $1,000, $5,000, and $20,000 your available credit is $36,000. If you have balances of $800, $2,000, and $5,000 on those cards then the ratio of your available credit to your debt would be 21% (ish).
Broadly, the credit bureaus give you a better score the lower your ratio is.
(Note: credit scores also take into account medical debt, car loans, mortgages, HELOCS, etc…this is just a very basic example.)
The length of your credit history
I opened my first credit card when I was 18 years old and about to embark on the college experience. It had a $500 limit! Seriously. I think after about a year, it was bumped up to $1,000. I probably don’t use that card as much as I should any longer – since I now have better credit cards with rewards and higher limits. But that card now carries a lot of weight. Because it’s my oldest line of credit.
My credit history goes back 15 years and shows that I’ve been responsible with my debt for at least that long.
This is why you might hear people suggest to those who are trying to build credit, that they should open at least one credit card. Unfortunately, the folks who don’t use credit cards and try to pay only in cash are somewhat penalized with this system.
Your payment history
Do you pay your bill on time each month? Good job! Because any late or missed payments can have an effect on your credit score.
I am not perfect. I have lots of systems in place to make sure that all my bills get paid on time, but I happen to have one store credit card that I only use sporadically. As a result, this past summer, I forgot to make a payment for two months! I watched my credit score drop a couple of points and got concerned and that’s when I realized I forgot to pay that bill!
It really does matter!
The frequency with which you open new cards
Every time you apply for a new credit card or loan, your credit gets pulled. This pull can have a small, temporary effect on your credit score.
This past summer I got LASIK. I had the money to pay it off, but the doctor was offering 0% financing for 12 months. I decided it was worth it for me to keep my money in a vehicle in which it was making money for as long as I could before I pulled it off to pay off my new, special eyes. So, I accepted the finance offer. That caused the doctor’s office to pull my credit score to in order to make sure I qualified for that finance offer. As a result, my credit score dropped just a bit.
Why do we care?
Your credit score can have an affect on you in many different ways. The time that most people begin to worry about it is when they’re ready to buy a house or a car. Suddenly, they’re like, “SHIT. MY CREDIT SUCKS.”
Well, I’m here to tell you that you should worry about your credit score ALL THE TIME.
Did that scare you? Sorry. It should.
YOU SHOULD WORRY ABOUT IT ALL THE TIME.
Why? Because we don’t know what life will throw us.
What if your paid off car shits the bed tomorrow and you have to buy a new one? Your credit sucks so the only financing offer you can get is for 10% interest! Holy crap. That SUCKS.
What if your roommate bails on you to go live with that guy she just met on her trip overseas to “find herself?” Now you need to find a new place to live and your credit score is shit so no one wants to rent to you.
Your credit score can even impact the rates you get on your home and car insurance.
And while it’s pretty shit, some employers will pull credit scores before offering you a job! Usually, these are industries in which folks will be working with money. But if you’re looking for a government job, you could have your credit score pulled as well.
We should worry because so many things can be affected by ourcredit score.
Any and all of these things could happen at any given time. Remember, that your future self is a lazy bitch. So if you can do things now (like monitor your credit score) to make things easier for her in the future, you’ll be much better off.