All About Credit Scores
Do you know your credit score? If you don’t, you’re not alone. Sixty percent of Americans don’t know their current credit score, and 65 percent haven’t looked at their credit report in the past 12 months, according to a 2014 poll by Harris Interactive, conducted on behalf of the National Foundation for Credit Counseling.
The majority of those who didn’t know their credit score said they hadn’t looked at it because they didn’t intend to borrow money any time soon and/or didn’t know of any reason why they should look at their score. Yet a credit score provides valuable information that can help you with your overall financial management, even when you’re not applying for credit.
What is a credit score?
Many companies, including the three national credit bureaus, generate consumer credit scores based on information contained in consumer credit reports. The score serves as an indication of an individual’s credit risk level, and while scoring models can vary greatly, typically it’s assumed that the higher the score the lower the risk.
Unlike credit report information, your score is not stored as part of your credit history. Rather, it’s generated when a lender (or anyone else you’ve given permission to) requests your report. Your credit score changes as the elements in your credit report change. For example, payment updates or a new account could cause your score to fluctuate.
Credit report information that can affect your credit score includes:
- History of payments and whether they’ve always been on time, late or delinquent
- Longevity of accounts (how long you’ve been using credit)
- Ratio of credit available to how much credit you’re using
- How many new accounts you may have applied for or opened in a short period of time
- Number and type of credit accounts
Information that is generally not considered in calculating credit scores includes:
- Age, race and marital status
Why are credit scores used?
Credit scores are intended to help lenders make fair, consistent and objective decisions about a consumer’s level of credit risk. In the days before credit scores, lenders had to physically review every applicant’s credit report and use their own judgment – which introduced the possibility for mistakes and bias. A credit score is one tool that can help a lender gauge an applicant’s ability to repay a debt.
Consumers also benefit from credit scoring. Your credit score is a snapshot of how well you manage debt, and it can also help you make more informed decisions about how you manage your finances. For example, if your score is only average and you plan to buy a house in the next few years, reviewing your credit score and report can help you identify financial habits that may need to be addressed before you take on a mortgage.
Why does your score matter if you’re not borrowing money?
Lenders aren’t the only organizations that may look at your credit score. Landlords, utility providers, cellular service companies, insurers and even potential employers may all ask to review your credit report and score as a tool in determining whether they want to do business with you and on what terms.
For example, if two people apply for an apartment lease with the same monthly income and good rental history, a landlord may decide to choose the one with a higher credit score. Or, he may ask the person with a lower score to put more money toward security. Auto insurers may also offer varying premiums to drivers based at least in part on their credit scores.
How can I see my credit score?
Although everyone is entitled to review a free credit report once a year from the three national credit bureaus, credit scores are not free. If you’re applying for credit like a mortgage, your lender may share your score with you but they are under no obligation to do so.
However, credit bureaus do offer multiple ways for consumers to obtain their credit scores at a nominal cost. One caveat: if you have no credit history – because you are a young adult or have simply never used credit – it may not be possible to get a credit score until you’ve established enough history of credit use.