Let’s talk about credit. Yes, that scary 6 letter word. Almost as scary as that other 6 letter word, Tinder.
What is credit you may wonder? Credit and credit scores basically tell a creditor (an institution that is planning to lend you money to buy things or services) whether or not you are going to do a good job of paying them the money that you owe. This is tracked through your Social Security number and is used for a number of things like fraudulently ordering $800 of Verizon phones in your name (kidding, but no seriously it happened).
If you only use cash and debit cards, you will probably never go into debt- yippie! But you will likely have little or no credit either, boo 🙁 This does not mean that you are not worthy of having credit, it simply means that you have not borrowed and successfully proven that you can repay money yet. This is not the same as someone who borrowed money and did a poor job of paying it back- even they would likely be above zero, but this is not necessarily better.
When and Why You Should Care
Credit doesn’t play a huge role in your day to day life until suddenly you need it.
Things your credit is used for but your score doesn’t have a huge* effect:
- Renting an apartment
- Setting up utilities
- Getting a new cell phone
- Applying for a new job
*Poor scores probably won’t help your case here, but they likely won’t disqualify you from moving forward either
Things your credit is used for and your score has a huge** effect:
- Qualifying for a mortgage to buy a home
- Leasing a car
- Private student loans
- Applying for a new credit card
**Poor scores here will likely prohibit you from being able to move forward at all or move forward with a manageable and desirable rate. In other words, if you have bad credit but are approved, get ready to pay $$. If you have good credit, you are more likely to afford the things you want to buy!
Credit Report vs. Credit Scores
When you hear people talking about “credit” they are typically talking about their credit score. The typical range is 300-850 and is almost always determined by the Fair Isaac Corporation aka FICO. There are other scores out there, but you’ll probably never come into contact with them.
FICO does not reveal exactly how they calculate your score (cool, thanks), but there are some general guidelines for what goes in to your score and how your score measures up against others. The scale of what is considered “bad” vs. “good” is also not set in stone, but typically falls along this breakdown:
This number is a quick reference to the state of your credit, just like the letter grades A, B and C give a quick reference to how a student is doing in school. A credit report, on the other hand, is more like the full breakdown of class points which shows how the student is doing in each area. A student who receives a B (or has average credit) may still be a good student or candidate for credit depending on which category brought down their score. The report itself will contain details such as number and type of accounts open (like student loans, credit cards, car loans etc.) and your payment history (are you paying the full balance, did you miss payments etc.) If you are just out of school your history is probably pretty bare, but do not fret this will change soon enough when you become AN ADULT (scary I know)!
What is a Credit Bureau?
You’ve probably heard at least one of these names- Equifax, Experian, TransUnion- but do you know what they are? These are credit bureaus. There are others, but these three are the largest. Their job is to determine if you are worthy of credit- aka will you pay back the money if it is loaned to you? Each one collects information on your spending and payment history (on non-cash purchases obivously i.e. credit cards, loans etc.) and calculates a unique report with matching score. Reports and scores amongst the three tend to be similar though not identical.
Should I Check Now and How Often Later?
If you have never checked or it’s been a while, now is a good time to start. This will give you a baseline to use as comparison for later and give you the opportunity to make sure nothing strange is going on currently.
You can check your own information as often as you would like without harming your score. Credit checks from your existing lenders and potential employers also do not hurt your score. There are some types of checks, known as “hard inquiries” that may negatively hurt your score but more on that later.
Should I Check My Report or Score and How Do I Do It?
As mentioned before, a score is the “letter grade” equivalent of your detailed report. Outside of Credit Karma (see below), receiving your score usually requires paying a fee or “signing up” for some service and cancelling it before they charge you (do this at your own risk!) Knowing your score is a completely personal choice- if you’ve never missed any payments and always paid your balances in full, your score is probably pretty good. If you’ve slipped up a few times, it may be beneficial to see where you’re at. In the end- unless you’re planning to qualify for some major loans in the next few years (car, mortgage, grad school) your score won’t really affect your day to day life.
According to the Fair Credit Reporting Act, you are only entitled to one free report (not score) from each of the three credit bureaus per year. You don’t need to get all three at the same time (as mentioned above, they’re generally pretty similar) so what most people do to maximize their free information is to get one report every 4 months and rotate between Equifax, Experian and Transunion. Save these or track when you got the report in your calendar.
If you want more than one free report every 4 months you can certainly pay for it, but if you haven’t had any life changes, there won’t be much going on in between. Especially if you have taken the steps to protect your credit with a freeze! A freeze will not affect your ability to run credit reports and check your own scores.
To access your free reports you must use this website: https://www.annualcreditreport.com/ You cannot request your free report through the individual credit bureau’s websites, even though that is where is information is coming from. It’s weird, I know, but I don’t make the rules here people! Don’t even bother with any of those “freecreditreport.com” websites, because there is always a catch like having to “deactivate” within a certain period of time or you get charged. They have catchy TV commercials, but that’s about all they’re good for!
What is “Credit Monitoring” and Should I Do It?
Credit monitoring is exactly what it sounds like – a service that monitors your credit. Almost all of them get expensive FAST and in my opinion are a waste of money. Prices range from $5-$30/month, and those low prices are usually introductory rates. Credit monitoring offers some cute little dashboards where you can check your reports and scores all you want, plus they alert you when a change has occurred. But guess what- at the end of the day it is just monitoring and all that little alert tells you is that something has happened aka it’s too late! Why waste the money every month when you could just avoid the headache and freeze your credit!
There does seem to be one notable exception with Credit Karma, which according to their site “leverages an advertising model meaning that advertisers pay for the credit monitoring service [and] consumers are never charged.” I personally have not used this site, and therefore cannot recommend, but I will look into it and update soon.
Be wary of any other sites: at best they may cost you an unnecessary monthly fee, and at worst they may even be fake websites scamming your Social Security and credit card numbers- just what you were trying to protect in the first place!
Want to know more?
For additional information check out the FTC website
Thanks for reading! Hope you learned something about credit and start to take more control over your financial life, it can be rewarding.
Coming Soon: How Do I Get Good Credit and When Should I Use It?