I don’t care about my credit score.
You shouldn’t either.
Why? Find out here…
Everybody holds their cash close and their credit score closer.
Not me. I don’t really care what my credit score is.
I do, however, pay close attention to my credit report. You should too.
What’s the difference?
- Credit Score = a number assigned to a person that indicates to lenders their capacity to repay a loan.
- Credit Report = A detailed report of an individual’s credit performance on each obligation over a long period of time.
There are three major credit bureaus: Equifax, Experian, and Trans Union. And yes, each bureau ranks everything differently, and mysteriously. Fun right?
Let’s break it down. Each of the three credit bureaus collect information (who you are, what you owe, how you pay) and create a credit report based on that information. Lenders use this credit report, along with other details (your income/job time, what you’re trying to get a loan for) to determine your creditworthiness.
Think of it this way. Your address written on paper is an identifier to say “this house is located at this spot on this street“. Your address doesn’t tell others how many people live inside, how big it is, or the contents of your house. All your address does is tell others where you are on a street. When you want to sell your house to somebody, they take a look inside it. If they like what they see, they make an offer.
Your credit score is your address. Your credit report is your house.
Here’s how your credit score ranks.
Most lenders use your credit score for a few things. They use it to decide what interest rate you will earn (the higher the score, the lower the rate), it’s used to offer a snapshot on 7+ years of your credit report, and sometimes lenders have an automated system that will help expedite loans for them based on the applicant’s credit score. That’s about it.
Your credit score is ranked on the following things:
- Inquiries – 10%: How often do you apply for loans? Statistically, the more often you apply for loans…the more likely you are to default or declare bankruptcy.
- Mix of Credit – 10%: How many different types of loans do you have? Credit cards, auto, mortgage, student loans, etc. Lenders like to see that you can manage a good mix of credit types.
- Length of Credit History – 15%: How long have you held these loans? The longer you pay on a loan, the more stable you appear and the higher your score will be.
- Outstanding Credit Balances – 30%: How much do you owe on your loans? The higher your balances, the less financially independent you appear, and the lower your score will be.
- Payment History – 35%: How often do you pay on time? How often do you pay late?
Just like your address ranks where on the street your house is… your credit score takes your credit report into account and ranks where you fall on a spectrum.
Lenders take a detailed look at your credit report to see how you pay other lenders (month by month), how much you depend on credit to survive, and what payments you’ve missed. The contents of your report weigh heavily into whether or not the lender is willing to loan you money. If you have a history of having cars repossessed (either voluntarily, or involuntarily), they will be less likely to trust you with their money to buy another car. Plain and simple. As an added note, most things will remain on your credit for 7 years from the last date of activity. Good, bad, and ugly.
- Do you have bad credit? THIS article will help you rebuild it.
- Do you know what a good interest rate even is? THIS post will tell you.
- Have you suffered a repo? Check out THIS post on how to start over…the right way.
Likewise, I recommend that you go to www.AnnualCreditReport.com and obtain a free copy of your credit report, once per year, from all three bureaus. Study it for errors and discrepancies, and report any that you find. They don’t know if there is an error unless you tell them, and mistakes on your report can drag your score down…costing you thousands of dollars.
A high score doesn’t mean that you’re financially independent.
Man Vs Cash advocates that credit scores and credit report facts should be mandatory knowledge in our world since it’s used to to secure things such as utility accounts, cell phones, low insurance rates, and may other things…however:
Credit scores neither take income, nor savings into account. Your credit score is not a complete measure of how well you are doing financially. In reality, it scores your “debt management” ability because it only measures how well you borrow and pay back money.
You could have 1 loan for six months at age 18 and have a high credit score because this loan was paid as agreed. You could have 50 loans over 40 years of life and have an average credit score because some items like your house could have a big balance remaining. Which person do you think will be able to get another loan easier?
Likewise, You could make $15,000 per year and have the same credit score as somebody who makes $150,000 per year. Good, or bad score.
My advice? Keep a diligent eye on your credit report, but don’t worry about your score unless you’re intending to apply for a loan. Also, don’t be actively concerned about your credit score…be concerned about your SAVINGS ACCOUNT balance. That’s the one that counts.
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