Wisdom Wealth Strategies Logo

Pay Attention to your Credit Score

Get the latest expert financial tips and advice + access to our free financial checklists.

We’re pleased to bring you the following information courtesy of mpowered, a “Colorado-based nonprofit resource for individuals and families in Colorado who want to learn about money management and participate in coaching to achieve their personal definition of financial success.”

You may have heard that you should keep a close eye on your credit score.  When you apply for a loan, the lender will look at your credit score to determine your likelihood of repaying the loan.  When you apply to rent an apartment your landlord will ask to do a credit check.   You may also have been asked to allow a company to pull your credit in order to turn on a cell phone or utilities.

However, did you know that a low credit score could limit your security clearance for government and military jobs?  Did you know that a potential employer could decline you for a job based solely on your credit score? A low score could also force you to pay extra-high rates for auto insurance despite a flawless driving record.  Your credit score, once used exclusively by credit grantors to make lending decisions, is now used by a wide range of organizations to make financial and nonfinancial decisions affecting you.

What’s a credit score?  Your credit score is a number.  You actually have three different credit scores – one from each of the three credit bureaus.  The contents of your credit report are translated, using complex formulas, into a 3-digit number called a credit score. This number is used by lenders and other organizations to indicate whether you are likely to responsibly repay debt in the future.  The scary part of this is if your score is low (accurately or inaccurately), organizations will make negative assumptions about your character and your ability to manage your finances.

What’s my FICO® score?  Credit scores are often called FICO scores because most credit scores in the U.S. are produced using calculations developed by Fair Isaac and Company.  The Vantage® Score is another popular scoring model.

  • There are other credit scores, but FICO scores are the most commonly used by lenders.
  • FICO scores range between 300 and 850.  Vantage Scores range between 501 to 990.
  • Higher scores are better scores.
  • Your score is a snapshot of your credit at one point in time; it changes!

Does my income influence my credit score? No.  Your income may affect your ability to qualify for a loan, but it’s not part of the credit score model.  There are many pieces of your credit report that are NOT factored into your credit score, including:

  • your age, your salary, occupation, title, employer, or employment history, where you live, and interest rates on your loans
  • “soft” credit inquiries including requests you have made for your own credit report, requests made by employers, requests made by lenders to make pre-approved credit offers, or requests made by your current lenders for account review purposes
  • whether you are participating in credit counseling or debt management

How is my score calculated, then? There are several factors that increase and decrease your score over time.  These factors can be grouped into five different categories as illustrated in the chart below.  The percentages in the chart tell us how important each of the categories is in determining the FICO score for someone in the general population.  There are several factors that increase and decrease your score over time.

mpowered Pic 

Five Ways to Damage Your Credit Score

  1. Close old accounts.
  2. Make your loan payments late.
  3. Leave errors on your report.
  4. Max out your credit cards.
  5. Ignore your utility, medical and cell phone bills.

How do I get my credit report?  Under the Fair Credit Reporting Act (FCRA), you can get 1 free credit report from each of the three major credit bureaus once every year.  Request your free annual credit report from www.annualcreditreport.com.  You may also request your free reports by phone or by mail. 

How do I get my credit score?  Your free annual credit reports do not include your credit scores.  Many web sites offer generic credit scores, but if you want to see the same information that your lender is judging you by, it’s probably best to purchase your FICO and/or Vantage scores.  You can purchase your score from each of the three credit bureaus for $7-15 each.

If you enjoyed this post, we encourage you to check out mpowered’s online credit tutorial. It’s full of excellent information and will help you understand more about your credit situation. Find it by clicking here or visiting www.mpoweredcolorado.org.

Download our Free Financial Planning Worksheets

Join our mailing list to receive your 2021 and 2022 Tax & Financial Planning Guide, as well as your Net Worth Statement and Spending Plan.