Here’s what you may not know about your credit score
Most people probably know that paying their bills late is one of the surest ways to kill their credit score.
But there are other lesser-known facts you should consider to avoid sabotaging your finances.
“Nothing affects your financial health more than your credit score,” said Michael Sullivan, a personal finance consultant with Take Charge America, a national nonprofit credit counseling agency based in Phoenix. “But there’s a lot of mystery surrounding credit scores.”
People often are surprised to learn that besides scores being used to gauge a borrower’s credit worthiness, some employers check applicants’ credit scores before hiring them. That’s common in the financial services sector where workers have access to sensitive customer data or large amounts of cash.
People hoping to work at a bank or credit union most likely will need a good credit score to get the job, Mr. Sullivan said.
Individual employers will have their own cutoff for what is considered a good score, but generally it will be somewhere around 700 to 720 out of a possible 850, he said.
“Credit scores have become a surrogate for character,” he said. “I think it’s unfortunate that we judge people by a three-digit number, but folks need to know that it’s used that way.”
In many states, insurance companies use credit scores to help set rates. Customers with the highest scores get the best rates.
“They are looking to see if you are a risk based on your character,” Mr. Sullivan said. “They found that you are more likely to file a false claim if you have a low credit score.”
Some other facts about credit scores that may surprise you:
• Your score won’t improve if you cancel a credit card. Closing an old card can actually hurt your score because it can raise your utilization rate (total credit card balances as a percentage of available credit). In creditors’
eyes, using too much of your available credit is unsettling because it could signal that you’re overextended financially.
• Not having any debt doesn’t equal good credit. Some people assume that having no credit cards or other debt will get them a higher credit score. But creditors need a history of debts and repayments to predict future risk of default.
• The amount of money in your savings account has no bearing on your credit score.
• Overdue library fines and medical bills can hurt your score. Libraries often try to collect fines using collection agencies, which report to credit bureaus. Similarly, unpaid medical bills often go to collection agencies.
• Errors are common. A study by the Federal Trade Commission released in 2013 found that 20 percent of consumers had an error on at least one of their three credit reports, which could unfairly lower their credit score. You can check your reports by ordering them for free once a year from each of the three main credit bureaus at www.annualcreditreport.com, or by calling 1877-322-8228.
Look for things like credit cards you didn’t apply for or a fraudulent loan in your name.
If you find a problem, contest it with the lender and the credit bureau. For major errors, Mr. Sullivan suggests corresponding in writing using certified mail instead of filing the complaint online.
More information about ordering free credit reports and disputing errors is available at www.consumer.ftc.gov.
Whilefederal law requires creditbureaus to provide creditreports for free once a year,consumers historically havehad to pay to get a look at their credit scores.
In recent years, more credit card companies have been providing free scores as a perk to their customers. American Express, for example, allows cardholders to access their FICO scores (the score most widely used by lenders) on the Amex website.
Websites such as Credit.com and CreditKarma.com provide lesser known scores for free, which is “good enough to let you know what your range is,” Mr. Sullivan said.
Websites offering truly free scores won’t ask for your credit card number or other payment information, but will require personal information, including a Social Security number.
Mr. Sullivan said most people don’t need to check their credit scores very often.
“Your credit score is just a computation of your credit report. So as long as your report is accurate and good and everything shows paid as agreed, then you are going to have a good score.
“I tell people don’t obsess about it. Certainly don’t pay a lot of money for it.”
“Your credit score is just a computation of your credit report. So as long as your report is accurate and good and everything shows paid as agreed, then you are going to have a good score. — Michael Sullivan, personal finance consultant, Take Charge America