Two years ago I started the painful process of finding affordable, rodent-free housing in New York City. My roommate and I went from Craigslist to brokers to emotional meltdowns on street corners. During this process was the first time I learned my credit score, in the small, back-alley office of a Russian broker who seemed as cuddly as Ivan Drago.
(Yes, I know this movie came out 4 years before I was born. I grew up overseas so my pop culture references are a decade delayed.)
As I started filling out my application for an apartment, Ivan gruffly said, “We need $30 for the credit score, dah?” I glimpsed helplessly at my roommate wondering if this was some scam to a separate a poor, recent college grad from all the money in her wallet? Naively I asked (in my best Rocky voice), “Why do you need my credit score?” Ivan turned to me and said, “So we know if you’re trustworthy or not.”
I handed Ivan $30 to find out I was indeed trustworthy, but that the landlord was not and I ended up having to repeat the process all over again. Don’t worry, we ended up with a delightful landlord who reminds me of “Gus” Portokalos from My Big Fat Greek Wedding, only with much less Windex.
(I can’t say it wouldn’t have surprised me if my landlord had me fix our pipe problem with a little Windex.)
After my encounter with Ivan I wanted to learn how I had managed to create a “trustworthy” credit score. This is what I discovered…
What goes into a credit score?
A big, scary company named Fair Issac and Company (or FICO) uses five different factors to give you a credit score. Your score will range between 150 to 990 points (hearing 300 to 850 is more common). Similar to pretty much any sports competition (except golf because it’s just silly) the higher your score the better.
The five factors are:
- 35% – Payment history
- 30% – Amounts owed
- 15% – Length of credit history
- 10% – New credit
- 10% Types of credit used
However, the percentage chart shouldn’t make you think you can disregard any particular piece of the pie. Just because your credit cards would only make up about 10% of your credit score doesn’t mean you can run up a bunch of debt and expect only marginal impact on your credit score. If you max out your credit card and then are 30 days late on a payment it could cost you 110 points. It’s similar to getting a zero on a pop quiz in college and then losing your A in a course. It may be a small piece, but a low score can still hurt.
You should also keep in mind that credit reports were not created equal. FICO makes it clear that categories vary for each person.
“Your FICO credit score is calculated based on these five categories. For some groups, the importance of these categories may vary; for example, people who have not been using credit long will be factored differently than those with a longer credit history….Therefore, it’s impossible to measure the exact impact of a single factor in how your credit score is calculated without looking at your entire report.” – myFICO
Why does your credit score matter?
Because it will cost or save you money. A low credit score could make lenders wary of loaning you money, or more realistically, make them salivate because you’ll probably rack up fees and they can charge you a higher interest rate. A low score can also hike your car insurance or offer on a home loan, prevent landlords from wanting to have you as a tenant and allegedly prevent you from getting a job.
What hurts your credit score?
Probably what you’re already thinking: debt, maxed-out credit cards, late payments and heavy-hitters like foreclosure, accounts sent to collections, defaulting on a loan and bankruptcy.
How can you improve your credit score?
What happens if you already ran into a few issues and tanked your credit score? Or you might just be curious about how to keep it “trustworthy”?
- Pay your bills on time.
- Be consistent about paying off any debt.
- Try to stick with a credit card (or two) and avoid constantly opening and closing accounts.
- Don’t apply for credit too frequently.
- Do the best you can to prevent identity theft. Watching what you put on social media, keep your account and password information private (even from significant others, friends and possibly family), monitor your credit report, review your monthly bill (or even be more proactive and check on a regular basis for any abnormal activity), protect your computer and don’t click on links in emails from unknown senders.
How can you check your credit score?
I’m sure most (American) readers have at one point or another had a catchy Free Credit Report.com jingle stuck in their heads.
(I apologize that it is now likely stuck in your head. Several choruses of “It’s A Small World After All” should remove it.)
With terrifying statements like “Well I married my dream girl, but she didn’t tell me her credit was bad. So now instead of living in a pleasant suburb, we’re living in the basement at her mom and dad’s. Cause we can’t get a loan for a respectable home, because my girl defaulted on some old credit card…” the jingle encouraged viewers to use freecreditreport.com to check and monitor their credit.
You can go to sites like creditkarma.com to see a non-FICO version of your credit score. This will be a close approximation to your actual FICO credit score.
If you’re interested in feeling a great sense of accomplishment, then bypass the middle man and just go straight to the source. There are three main credit reporting agencies: Equifax, Experian and TransUnion. Oddly enough, they may (and likely do) all have different reports for you, so it’s best to receive of a copy from all three and analyze for any inaccuracies you may need to dispute. You are entitled to a free copy of your report every 12 months. However, these reports will not contain your credit score, because that you have to pay for. You can go to annualcreditreport.com to view all three copies of your credit report for free.
You can request your credit score from all three credit reporting agencies through FICO for $19.95 each.
Credit scores aren’t fairest way to asses your “trustworthiness” but it happens, especially if you’re looking for housing in New York City.
When did you first learn the importance of your credit score? Have you been proactive about improving or maintaining your score?