The Credit Score: The Bare-Bones Essentials

 

“It says insufficient funds, I’m sorry”

My palms are moist and hands are shaking. 

I suddenly felt what seems like waterfalls of sweat dripping off my armpits.

“Hmmm, are you sure? Can it be your machine? I want to try again please.”

The ego inside is weeping. Maybe there is a god somewhere that could magically, just for this time, approve the transaction? I had to try.

“I am very sorry sir, I believe you don’t have enough funds available on your credit card.”

As she is talking to me I can hear people in the line behind me chuckling.

I don’t recall feeling so much shame.

I looked desperate and sweaty in this over air-conditioned department store. 

“Okay then, I guess I will leave now…” I said in a trembling 18 years old voice.

I resigned to leave my items at the counter and walk toward the exit…

 

Following that event, I first got interested in what was credit and ultimately how to get better at it. My bank at the time offered me my first credit card and I just thought it was a gift card. I had literally no idea!

 

Years later, I can confirm that no matter where you stand with your credit knowledge, there is a way. I am living proof (see the picture above).

 

 

In part 3, we will cover an important metric that you need to be aware of: your credit score. There is a lot of information out there about credit scores, credit reports and credit bureaus. Here, we will only focus on what is considered important to know for Millennials and Gen Zs in their 20s and 30s.

 

 

What is the credit score?

The credit score is, in my own terms, a grade on how well you understand the debt game. It’s a number that generally varies between 300 and 850 (from 300 to 900 in Canada) that is an indicator of how reliable you are in handling debt. This can be through a credit card, a line of credit, a financing plan or a service that was given that you have to pay back within the next 30, 60, or 90 days.

 

How to know your credit score for free?

There are different ways to know your credit score. Some banks give access to your credit score on their website. The problem is that you are limited in the number of times you can check.

There are also apps you can download on your phone to see your information. I use a very popular app named Credit Karma to check my credit but there is also Credit Sesame and Wallet Hub that are available. Each of these apps offers different products and recommends credit cards based on your credit score. If you are starting your credit journey and are not sure of what credit card would suit your needs, I would not recommend that you purchase any of them before you know your financial objectives. Applying for credit cards on a whim is not a great strategy.

 

How many different credit scores there is?

In the US, there are three credit bureaus: Equifax, Experian and TransUnion. Each of these companies has its own data on you and your debt paying habits. They also have their credit score algorithm. Which is why your score may differ from one another. In Canada, there are 2 major bureaus: Equifax and TransUnion. 

Which credit score is the most important?

The short answer is: All of them are important.

But there is a more popular one among lenders and banks when evaluating your reliability with debt payment. This score is the FICO score which is an independent company that has its own algorithm based on all three bureaus credit reports.

 

When are credit scores updated?

In general, companies that lend you money (creditors) report your information to the bureaus on a 30 days cycle. Each of the creditor’s 30 days cycle ends at different dates and most of them do not always report to all bureaus which make the information of each bureau not 100% complete. The credit score will adjust every time a creditor will send information to them. So the credit score updates as frequently as reports are coming in.

 

Why does the credit score go down when checked?

There are two ways to check your credit score: a soft inquiry and a hard inquiry (a.k.a. hard and soft pulls). Only the latter affects your credit score. A hard inquiry generally happens when you actively apply for any type of credit such as a credit card, a student loan, a mortgage, a line of credit, a business loan, etc.

For hard inquiries to happen, the lender needs to have your approval. You either have signed an application form allowing it or have agreed from a verbal request. 

As cited on the FICO website, they may perceive frequent hard request has a “rate shopping” behavior if they are loan requests of certain nature. They tolerate multiple hard inquiries for an auto loan, mortgage loan or student loan when they happen within a short period. 

FICO says that they won’t affect a credit score for these specific loan applications for the last 30 days before your loan scoring and that they will group all these inquiries as one. Make sure to read the complete information on their website.

 

How to look for your credit score without hurting it?

The soft inquiry is the way to see what your credit score is without hurting it. You can look at your credit score on your bank website or apps such as Credit Karma without hurting it. You have updates every week and you can consult your report as many times as you want without hurting your credit. 

 

What is the difference between a credit score and a credit report?

A credit score, as explained earlier, is a number that represents the quality of your credit history. A credit report is a document that details the credit history with the number of active credit accounts the records of all past monthly payments and how they respect their deadlines. Your credit score is based on the credit reports information.

 

What is taken into account in the credit score?

According to one of the major credit bureau in the US, among many variables, 5 has the most impact on your score:

 

  • Making your payment within the allowed delay. If you can pay your bills on time, this will favorably affect your credit score. 
  • Paying down your debt. The important word in the previous sentence is down. Decreasing the total amount of debt you have will give a boost to your score.
  • The frequency of credit request you do. The number of hard inquiries you do can affect your credit score. You are better to restrain applying for loans and credit cards if you don’t have to.
  • The diversity of your credit sources. A good balance of mortgages, credit cards and loans in your history shows that you have experience and this is taken into account in the calculation of your credit score.
  • Negative information. A recorded bankruptcy, the appearance of collection agencies and missed payments all have an impact on the calculation of your score. Since these red flags can stay in your credit reports for at least seven years, try to avoid defaulting on payments at all costs.

 

How to increase your credit score?

In general, increasing your credit score takes time. You need to make sure you don’t miss any payments and to maintain your total amount of debt to a low level in comparison to the total credit you have access to. 

If you are doing everything right and are looking for ways that could rapidly make a difference to your credit score, try these tips:

  • Have a look at your credit reports to find inaccurate credit information. It happens occasionally that credit bureaus make errors in their reports which end up affecting negatively your credit score. Find and report these errors to have a correction and it may result in an instant increase in your credit score.
  • Using the Piggybacking technique. This is a technique that contains some risks but can increase your credit score dramatically in a period of 30 to 45 days. In a nutshell, it consists of having someone to share his credit history of one of their credit card account with you. The person needs to be a relative with ideally a very good credit history. This relative need to authorize you to their credit cards and their credit history and payment habits will be taken into account for your credit score. The risk this technique contains is that if the primary account holder defaulted on a payment, you will inherit that as well. Take note that not all credit scores use the authorized accounts information to calculate their score, but the FICO Score does. I invite you to learn more details about the piggyback technique by reading this article from Credit Karma

 

What are the perks that come with a great credit score?

If you have worked hard to pay your bills on time consistently, manage to keep low levels of debt and had a good diversification of credit card, loans, and mortgages, you may have come to the realization that your credit score is of 800 or higher. Congratulations and welcome to the 800 Club! Here are some of the advantages that a great credit score provides:

  • Negotiation power. An excellent credit score allows the lender to lower considerably the interest rates on loans, mortgages and even some credit cards. Take note that you still have to negotiate because oftentimes what they are offering by default is far from their bottom rate.
  • Credit cards galore. You can have access to about any credit cards you want. If you qualify for the revenue per year related requirements, you can have access to virtually any cards.
  • Insurance premium. Having an excellent credit score will get you the lowest insurance premiums.
  • Apartment background check. Being approved for apartment rental leases will be easier.
  • Car loans. You can manage to get lower introductory rates on a car loan if your credit score is of 800 or higher.

 

Do the credit fix companies work?

There are companies out there that offer the service of fixing your credit score. In general, they do the work that you could be doing yourself. These tasks revolve around checking your credit reports, calling the credit bureaus to dispute errors that may have been found (if there is any) for a fee.

Is it worth it?

I think that learning to read your reports and to dispute errors by yourself is much more sustainable in the long run. Also, there are a lot of services that make false promises of removing bankruptcies of your credit history,  which is not only false advertising but also illegal. My suggestion to you if you need help with your credit would be to reach a nonprofit credit counseling service. Try this service in the United States and here is an option for Canada as well.

 

What is the average credit score per age?

According to the Investopedia, the breakdown goes like this:

For the 18-24: 638

For the 25-34: 652

For the 35-44: 659

For the 45-54: 685

For the 55+: 724

It is specified that this is based on sample data and there can be a large margin of error. This is purely referential, so take these numbers lightly.

 

How to build your credit if you don’t have any?

So you are just getting started with credit? Here are the best ways to get the ball going. Fast.

  • Secured credit cards. This is a must, secured credit cards are probably the best way to get started in building your credit. The concept is simple. You secure your credit by making a deposit of $300 to $1000 and you get to access a credit card that limits your funds to the amount of your deposit. Your secured credit card payment habits will be sent to credit bureaus and will be used as data to build your credit score. Note that a secured credit card is not the same as a prepaid credit card. Prepaid cards are not tracked by the credit bureaus, thus are not affecting your credit score.
  • Use financing on purchases. There are a lot of stores that allow financing on your purchases. Some obvious ones are dealerships and furniture stores, but you can also finance eyewear, electronics, computer equipment, music instruments, car accessories, and many other things. This can give you a chance to show the credit bureaus that you are responsible with your credit.
  • Get a store credit card. Department store credit cards are pretty easy to get. Have a try at getting one with a low limit to get you started. And once again, it will be up to you to get make sure you pay the bill on time and keep the debt balance on it at a low level.

 

 

Your credit score: the sum up

This covers some of the questions you may have about the credit score. I have to say that the number is not a “be all end all” metric, but making sure you are doing all in your capacity to keep it at the highest possible will pay you by avoiding thousands of dollars in interest payments over time.

 

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