Allworth Co-CEO Scott Hanson outlines the must-know basics about credit scores.
Can you remember precisely what your financial situation was like 30 years ago?
Were you struggling, or are you one of those folks who, when it comes to money and credit, has always been on top of your game?
No matter what your financial situation was 30 years ago, or what it’s like today, here’s something that I’d like you to know: Three decades ago, my business partner, Pat McClain, and I founded Allworth Financial because we wanted to start a new type of firm, where the advice and guidance placed the interests of the clients first, 100% of the time.
Two years after founding Allworth, we created something that I’m thankful for every day: We started broadcasting a weekly, call-in, financial topic radio program named Money Matters.
It’s now one of the longest-running financial topic programs in America.
Over the last three decades, we’ve partnered with a handful of other firms that also have education-based radio programs, or who offer retirement planning workshops, but above all else, education is at the root of who were are as a firm.
We’d love for you to someday become a client of Allworth Financial, but even if you never do, we absolutely hope you benefit from our free articles and other resources, including our podcasts and workshops.
Lastly, while I love my career, and I plan on working as an advisor for many, many years to come, when I do eventually scale back, because I believe that our podcasts provide such an important service – answering questions for people who have an immediate need for professional guidance – I intend to keep hosting Money Matters long after my days as an advisor are through.
As this week’s article is about credit, here are 5 things for you to know.
1. What is FICO and what is it for?
FICO stands for the Fair Isaac Corporation, which is widely regarded as the pioneer in the method of calculating credit scores.
According to the Consumer Financial Protection Bureau, FICO is a particular brand of credit score and is used to predict how likely it is that you will pay back borrowed money on time.
2. What is a credit score?
Your credit score is a personalized number or rating that is typically derived from one of the three major credit bureaus (Equifax, Experian, and TransUnion).
Think of the three major credit bureaus as data collectors who, when queried, calculate your FICO score. These three entities each use a variation of the FICO score algorithm to compile your number, which explains why your credit score may vary slightly depending on which bureau the credit issuing entity (a bank, for example) uses.
Generally, people with higher credit scores, right around 670 and above, will receive more opportunity to borrow money from banks and lenders and at lower interest rates.
The highest credit score you can have is 850, while the lowest is 300.
3. Freezing your credit is pretty simple
First, why would anyone want to freeze their credit?
Also known as a “security freeze,” you may want to freeze your score if you’ve been hacked, you’ve had your identify stolen, or maybe you already have all the credit you need, and you just don’t want to worry about it for a while.
You’ll need to freeze and unfreeze your credit individually with each of the three main credit reporting agencies.
A few things to know:
- It won’t impact your credit score
- It won’t affect your current accounts
- It won’t entirely stop malicious activity, even if you’ve had your identity stolen
If you want to freeze your credit, go to:
Equifax: 1-800-349-9960 – Equifax.com
Experian: 1-888-397-3742 – Experian.com
Transunion: 1-800-916-8800 – Transunion.com
4. What are the most and least important numbers used to calculate your credit score?
Your FICO credit score is tabulated by the positive and negative information on your credit report. As a percentage of your total score, the information from your report is generally weighted like this:
- 30% of your score is based on how much money you owe
- 10% is based upon new credit (did you just open several new accounts?)
- 15% of your score is based upon the length of your credit history
- 10% of your score is derived from the mixture of the types of credit you have
- 35% of your credit is based on your payment history
Now, I said that the information in your report is “generally” weighted based on the numbers above, but there are other considerations, such as income, work history, and the types of credit or money you have historically borrowed.5.
5. Unexpected things that impact your credit score
We already know that things such as total debt, payment history, and age of credit are key factors that impact our credit scores. But what are some habits or events that could unexpectedly raise or lower our score?
According to the Federal Trade Commission, 20% of consumers have at least one error on their credit report, while a stunning 33% of consumers report finding errors on their own reports. 1
Note to self: Check your report(s) often, and get any misleading information removed. (I’ve done it and it didn’t take too much time.)
- Unpaid medical bills, parking tickets, and even overdue library books:
Though some unpaid bills may take years to make their way on to your credit report, sooner or later, unpaid fines and bills will catch up to you. While the fact that unpaid medical bills will lower your credit score may not come as a surprise, anything from an unpaid parking ticket to a forgotten cable bill, anything that can be sent to a collection agency, will eventually show up and ding your score.
I saved the best for last.
Of all the information here, the fact that paying off your debt can lower your credit score, irritates me the most.
That’s right. Under certain circumstance, for some people, paying off a car loan, or an installment account, especially if it reduces the diverse types of credit that you have, can actually lower your score.
Perhaps to balance out the fact that paying off a loan could temporarily lower your credit score, it’s good to know that, except for some bankruptcies, negative marks on your credit report must generally be removed from your history within seven years, while positive credit information, even accounts that were closed, but which you paid on time for the duration, will stay on your report for up to 10 years.
Obviously, doing what you can to keep your credit score as high as possible is important. Your credit score not only impacts how expensive it is to borrow money, but it could even affect things such as a job search.
If you have a question related to debt, credit, investing, financial planning, or retirement, you can email Money Matters and get it answered on air.
1 Common errors people find on their credit report - and how to get them fixed | Consumer Financial Protection Bureau (consumerfinance.gov)
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