- 1 What Is Your Starting Credit Score? And Why Is It Important?
- 2 What is a credit score and why is it important?
- 3 What Credit Score Does Everyone Start With?
- 4 What does your credit score really mean?
What Is Your Starting Credit Score? And Why Is It Important?
One of the most important things anyone should know about themselves is their credit score. But few know what their starting credit score was, or for some what it is.
Why is it important for us to pay attention to? And what can we do to make sure our credit score starts and continues to be good.
What Is Your Starting Credit Score?
If I asked you that what would you give me as an answer? 300 because that’s the lowest it can be? 850 because your score should be perfect since there are no negatives? Or, somewhere in between like the median of 687?
Truth is your starting credit score is simply nothing, or more specifically “no record found”. Whenever someone attempts to run your credit that’s what they’ll see until you get some sort of credit.
If you start with nothing, how long does it take to have something? Once you get your first credit card, or loan, etc. You don’t immediately have a credit score.
If you get a credit card and start using it, and pay the balance off every month (which shouldn’t be much) then after 3 months your starting credit score of “no record found” will now be “too new to rate”.
After 6 months however, you will finally have a score. This score will be based on those 6 months of credit use. Did you max out your card every month and not pay the whole thing off? Did you never make a single payment on it? Did you use just a little money and paid it as soon as the statement came in? All of these will have a impact on your credit.
I Have A Score Now Can I Make A Big Purchase?
If after 6 months you decide you want the newest sports car and go to the dealership to get it, you will likely be disappointed.
Even if you have a good score, say 720 to 800, the loan will be difficult to get. The reason is unlike your starting credit score your current score doesn’t tell the whole story. Yes you may have spent 6 months doing everything right. But, the loan officer will see that you only have 6 months of credit and your limit is only $1000 so why would they risk giving you a $40,000 car loan with such little history?
That’s not to say you can’t buy a car, you very well could get a loan through a credit union, or having a friend or family member co-sign a loan for you.
You Start From Nothing Don’t Waste It
Your starting credit score of “no record found” is a good thing. You have nothing negative on your score and you have the option to keep it that way. For the majority of people they have already negatively affected their credit scores in ways that only time will repair. But starting at nothing means you can never make those mistakes, you can get a fantastic credit score in 6 months. You can then continue to grow that score until you get a perfect score, or at least one that’s pretty close.
Finally, for more on this consider checking out pro finance blog’s article on ways to improve your credit score – its does a pretty good job of connecting the dots for you.
Cleverdude.com also has really excellent posting on 4 ways you can monitor your credit for free. Check it out if you get a chance.
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What is a credit score and why is it important?
What is a credit score, how is it calculated, and why it is (or is not) important?
Let us take a personal example in order to understand what is a credit score. We do not know each other. You have extra money that you are willing to lend in return of interest expectations. Apart from asking me details like my salary, my other debt obligations, my employment history; you will want to know have I taken loans from others before, and if yes then have I paid them back on the agreed terms and conditions (payment history).
In addition, you would want to know if I borrowed as much money as they were willing to give me, or my ‘needs’ were less than what I could have borrowed (utilization).
In addition, you would like to know how long have I been borrowing from others (age of credit history), you might want to know in total how many times have I borrowed and how many of the loans are still active (total accounts), you might want to know how many loans did I take recently.
And finally, you would like to know how many loans did I ask for (credit inquiries) and if I have any public records that might be of relevance (civil litigation where I was asked to pay damages, or previous loans that went into collections).
This is exactly the way anyone lending money to anyone will think, and the banks are no different. Banks are professional money lenders and a credit report lists all of the facts that we listed above (saying you might want to know).
The lenders (banks) want to know the following about you – credit card utilization, payment history, derogatory remarks, length of credit history, total accounts, and credit inquiries.
A credit report, like the name suggests is a report. That report is summarized into one number, called the credit score. The higher the credit score, the more creditworthy you are considered; and the more willing banks are to lend you larger amounts of money at a lower interest rate.
Naturally the next question is – who is collecting all this information about me… well the credit bureaus. There are multiple credit bureaus but the three most commonly used are Experian, Equifax, and Transunion.
Once upon a time, TransUnion had information on their website that hinted what a perfect credit score profile looks like:
- A few (say, 3 or 4) revolving credit cards, each with very high lines of credit ($10,000+), and very low balances on only one (or maybe two) of them at a time.
- At least one charge card (American Express, Diners Club, etc.).
- All accounts at least six months old, and at least one more than three years old.
- No derogatory remarks (public records).
- Very few inquiries — no more than one to three in a six-month period.
- At least one “installment” account in good standing, i.e., a mortgage, auto loan, or student loan.
One other thing that you should keep in mind is what I call the ‘recency effect‘. The more recent events have a bigger impact on the credit score, specially the negative ones. If you missed a payment two months back, the impact is far more devastating as compared to the situation if the payment was missed five years ago.
Missing payments will always have a bad effect on your credit score, so try to never miss them. The reason I mentioned the recency effect is – be extra cautious about making timely payments if there is an upcoming big purchase, like buying a house.
How much can a good credit help you save – let us say in the current market, people with excellent credit are getting mortgages at 4%, and people with average credit have to pay 5%. For a 30 year loan of $240,000; the difference between the interest payments over life of the loans is $51,327. Yes, just a 1% interest rate difference can save more than $50,000.
And what is interest rate (mortgage rate) dependent on? Primarily your credit history – there are a couple of other things that determine the interest rate, but it is mainly your credit score that determines the interest rate the bank will charge you. Interest rate has two components – one component is the part that the bank wants to make profit out of the loan business, the second component is that they charge you a little more if they think the chances of your repaying the loan on time are not as high.
You can get a free copy of your credit report from each of the credit bureaus once a year. In addition there are several other free resources to track your credit report/ score. Credit Karma is the best website whose sole purpose is to track credit reports. There are numerous credit cards that show FICO scores free of charge (one of mine does – see the screenshot ). FICO score is analogous to the credit scores provided by the three bureaus – actually all the three bureaus take FICO score into account.
Credit is a powerful tool, not only does it help you buy things now and pay for them in future, it also gives you rewards points and sometimes allows substantial tax savings on the interest paid. BUT remember, credit can backfire. If you are not extremely careful in using credit, you can land yourself into a lot of trouble….I repeat, a lot of trouble.
FICO credit score
Update 1/1/2016: My FICO score (see image above) was 778 on 10/21. And now it has dropped to 737 on 12/26/2015.
This drop has happened because I refinanced both my cars and also got a new credit card, so a lot of new accounts on my credit report.
FICO credit score 755 on 2/25/2016
I expect this drop in FICO score to be temporary and to come back to original levels in about 3 months. Remind me to share the new score in April 2016.
Update (2/25/2016): Now my FICO score is 755
OneMoreDime Special: Credit score is never looked at in isolation. It is always looked at together with the credit report. I personally know of an example where Creditkarma showed a credit score of more than 780 but this person was denied a credit card.
What Credit Score Does Everyone Start With?
Numbers define our existence when you really think about it. When you are born, you receive your Social Security Number, and hopefully, if our entire financial infrastructure is not in total shambles 50 years from now you will have a nice nest egg. In regards to the finances, when you begin your journey with your personal credit you have a credit score. But, where do you start?
Most people think once you use your first credit card you automatically have a three-digit number that is your credit score. This is furthest from the truth, in fact, when you decide to start using a credit card, you start at zero. Regardless of how much money you make, your race, job title or whatever category you can muster up, we all begin with a zero on our consumer report.
This is because to get credit you have to earn it. You have to go out in the world each day and use that credit card. Max out your card even; then apply for another card to help pay for the other one. That is how you build credit. We are joking of course, but for the most part, the only way you can start build solid credit is by buying things and when the time comes pay off your debt. This is how you start building your credit.
Most people do not know that it actually takes about six months before your credit report begins to reflect your score. Since you are a new lender essentially you have a clean state to start with. Most consumer report will start your score in the middle of the pack. Not too high or too low. Usually, the low end is around 300 and the high end is 800 or higher. Depending on how you handle your bills you could have a score closer to each end.
You are new to the club, so your file has a lot of growing to do.
With no prior credit history, you are in a state of limbo. You do not have good credit or very bad credit you just have credit. Since you are essentially a new fish, you have what lenders call a thin file. This means that you do not have enough credit history to warrant a high score.
Regardless of your standing, you need to build your score before you are impacted positively or negatively. Before you decide not to pay your first bill, however, you should also know that missing a payment or not paying your bills at all can make it harder for you to increase your credit score.
Can you reset your credit?
For the people that are stuck in a rut with mountains of bills and debt, there may be a solution for you, bankruptcy. Filing for bankruptcy has been labeled by many as a sign of failure. If used correctly, however, you can start with a clean slate. Hell, even our 45 th president has filed for it. While it can be helpful you also want to make sure all your finances are in order. You will be giving people permission to invade your personal finances.
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What does your credit score really mean?
If you are anything like most of us, you probably don’t know much about how they figure out your credit score, what your credit score is or even how to find out what your credit score is!
So during this blog we are going to investigate all of these things and hopefully you will leave with some enlightenment on the facts of your credit score and how to improve or even correct your credit score!
Firstly, let’s start with “what is your credit score?”
Your credit score is a number based on a critique or assessment of your credit at one point in time.
Your credit score helps lenders decide whether to lend to you, how much they should lend and possibly what interest rate they will offer you.
The next thing I can hear you asking is “How do they calculate my credit score?”
They calculate your credit score by assessing:
- Personal details.
- Type of creditors you have used.
- Amount of credit.
- The number of applications and enquiries.
- Any unpaid or overdue credit or loans.
- Any debt agreements or bankruptcy agreements.
There are a few credit reporting companies with whom the banks or lenders can go to, to get these credit scores and reports from. Most of them have similar information on you and use this to calculate that score.
A credit score is usually a number (depending on which reporting company is used) between 0 – 1,000 or 1,200. It is then put into a five point scale of how risky it is for lenders to lend to you.
- Excellent – you are highly unlikely to have any adverse events harming your credit score in the next 12 months
- Very good – you are unlikely to have an adverse event in the next 12 months
- Good – you are less likely to experience an adverse event on your credit report in the next year
- Average – you are likely to experience an adverse event in the next year
- Below average – you are more likely to have an adverse event being listed on your credit report in the next year
Once they have all of this information it gets collated into your credit report.
Your credit report is a report about your credit history.
This is the type of information you will find in your credit report:
- Personal details – Your name, date of birth, current and past addresses, employment and driver’s licence number.
- Joint applicant – A joint applicant’s name will appear if you applied for the credit with another person and both your names appear on the credit card contract.
- Credit cards – Information about the credit cards you hold.
- Arrears brought up to date – Any debts that were unpaid and overdue and have now been paid or settled.
- Defaults and other credit infringements – These could be utility bills or loan payments which are 60 days or more overdue and where debt collection activity has started.
- Credit applications – Any credit you’ve applied for including loans you have been the guarantor on. (Find out how guaranteeing a loan can affect your credit report.)
- Debt agreements – Any bankruptcies, court judgements, debt agreements or personal insolvency agreements in your name.
- Repayment history – Your repayment history on credit accounts like your home loan, personal loans or credit cards, has been collected from December 2012. The repayment history information includes: the date your credit payments were due, whether or not you made the payments by the due date (no payment or partial payment by the due date are both considered missed payments), and the dates you made any missed payments (but not the amounts that were missed).
There are a few companies with whom you can get free credit score reports.
- Credit Savvy – (Experian rating)
- Credit Simple – (Dun & Bradstreet Score)
- Finder – (Equifax score)
- Get credit score(Equifax score)
You can get varying results from different companies because your credit score can change from month to month as your finances change.
Why should I keep my eye on my credit rating?
Not only does your credit rating fluctuate as your circumstances change, but being diligent can help protect you from identity fraud.
Checking and keeping an eye on your credit report can ensure your information is correct and that you have made all the enquiries and listings on the report.
This helps alert you quickly if criminals steal your identity and sign up credit in your name.
What do I do if the information on my credit report is incorrect or fraudulent?
You can ask for your credit report to be updated or changed if a listing is incorrect or out of date free of charge.
However if you do not agree with what is on your credit report you can ask for additional comments to be made.
To do this you need to contact the reporting creditor to ask them to remove the report.
If your creditor won’t release the report then you can speak with your relevant Ombudsman.
Finally, although credit scores and credit ratings all sound a little scary and unmanageable the power is in the knowledge of what they are and how they work.
Before you go and apply for your next loan apply to one of the above companies and get a copy of your credit rating so as you can negotiate a better deal or interest rate and get in the game!