Whether you know it or not, the corporate world is quietly measuring you. Everyday, little things you do get recorded, processed, and analyzed. It’s not new, nor is it a secret. The choices that you make with your money all distill into a number that compares you to the people around you.
You’ve heard of it: The Credit Score.
The Credit Score is one of the two components you need to access good debt. The other is the Credit Report. Debt can be a useful tool. If you know how to use it, it can catapult you to the next level.
Why should you care what score some company gives you?
It’s not about the number, it’s about the trust.
When people come to you to borrow money, you know who you can trust. Someone you trust asks you for $100? No problem. You know they’ll make it right.
Someone you don’t trust asks you for $100, you say no. Or maybe you’d think about it if they’ll jump through your hoops.
Stranger on the street walks up to you and asks to borrow $100? Don’t have a lot of reason to trust this person. Maybe they pay their debts, maybe they don’t.
The Credit Score is part of how money lenders know if they can trust you.
Chances are the biggest purchases you’re going to make are going to be made on credit. If you’ve got good saving habits, you might buy a car out of pocket. But probably not a house, and probably not higher education.
This trickles down even further.
If you buy insurance, or rent an apartment, they are going to want to know if they can trust you. If they don’t think you can pay the bill every month, they are going to want to charge you more to make up the difference – in case you don’t pay up in the future.
Having a bad Credit Score today means that people trusted you in the past, and you messed up.
Doing things right today means you’ll earn more trust tomorrow.
So how do they come up with this score?
There are different systems, but the most common is the FICO Score. The company used to be called Fair, Isaac, and Company. It ranges from 300 on the low end, to 850 on the high end:
- 800+ means you’re exceptional
- 740-799 means you’re very good
- 670-739 is above average
- 580-669 is below average
- Less than 579 means nobody trusts you
If you want the best deals, you should be shooting for 730-760 as a minimum.
FICO uses information from your credit report, and cooks up your score with a secret recipe they’re keeping to themselves. But what we do know is that it breaks down like this:
- 35% How good (or bad) you’ve been with making your payments
- 30% Amount owed (or percentage of current available credit you’re using)
- 15% Length of history (or how long you’ve had credit accounts)
- 10% New credit (or how often lenders are looking at your credit history)
- 10% Credit mix (credit cards, lines of credit, store credit, loans…)
Checking your credit score can be done http://www.myfico.com/ for $20 or so. Or if you want to save a few bucks, you can get an estimate using some online tools. Looking at your own score doesn’t move the needle, but having too many outsiders looking too often will.
You need to know where you stand.
There are actually a few different variations of the FICO score, but at this stage, all you need is to see where you’re at today. The score moves. If you grab your Credit Report and Credit Score and everything looks good, you’re done for the year.
If it’s not-so-hot, then it’s time to think about what you can do to move it in the right direction. You want to do this before you need it. A few percentage points difference in mortgage interest rates can mean thousands, or even tens of thousands of extra dollars paid over the long run.
Start fixing it today so it’s ready for you tomorrow. We’ll address how in the next article.