Credit Score 101

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Hi everyone, I’m your host Maddy and I’m so excited to have you here for this episode. We’re going to talk about credit score. Now I know this is a topic that probably doesn’t drum up a lot of excitement but it’s one that’s always in our faces. It seems like you can’t talk about money or finances without hearing about credit score and I get it, how can a number be so important? In this episode and in the next couple of episodes, I’m going to answer that question.

First, let’s just start with what a credit score is.  A credit score is a three digit number that summarizes everything in your credit report. And just a quick side note, in case you don’t know what a credit report is, it’s basically a financial report card. It has information about your credit activity, credit history and your current situation. So you’ll see your payment history on credit accounts, types of accounts and things like foreclosures, bankruptcies and inquiries. Okay, back to your credit score. It indicates to lenders how likely it is that you will repay a loan. Basically it tells lenders how trustworthy you are. Can they trust you to pay back the loan on time? It helps them decide whether or not they’re going to lend you money. Now I want to relate this back to our everyday lives to help us see through the eyes of the lender. So let’s imagine for a minute that someone asked you to borrow money. This could be a friend, a family member, a coworker or just an acquaintance. Would you ask any questions before giving it to them? Because I know that I would. And as we go through these questions, let’s think about this as a lender deciding whether or not to give you a loan. Because that’s basically what you’re going to be doing if you let someone borrow money from you, you’re giving them a loan. So the first question I would ask is how much money do you want to borrow? Then I would want to know when do they plan on paying me back? Are they planning on paying me back tomorrow or next week or in a year? Or are they even able to pay me back? Do they have the intent to pay me back? I would also want to know what they need it for. And last, what is this person’s reputation for borrowing money? And this one is a huge one. Do they pay other people back? Do you a have history with them borrowing money from you and is that history good or bad? Have they not paid you back in the past or have they always paid you back when they said they were going to? Lenders are asking the same things when you apply for credit. They want to know if and when you will pay them back. They use your credit report and score as tools to determine this.

So now that we’ve gone over what a credit score is, let’s talk about what a credit score looks like. Credit scores typically range from 300-850, a higher number is a better score. And just a quick fun fact for you. Okay, guys, I don’t know fun it actually is but just a quick fact. According to Experian in the year 2019, the average credit score in the United States was 703 and 703 is actually labeled as a good score. This is up from 701 in 2018 and 693 five years ago. Scores can fall anywhere in the categories from exceptional or excellent to very poor depending on the number. And if you’re curious where your score falls, you can look up Vantage Score or FICO score to find out. These are the two most popular scoring models that lenders use and they do calculate their scores a little bit differently meaning that your score will likely not be the same between the two models. Now it’s not going to be a huge difference, if you have a great score with one model, you’re going to have a great score with the other, it might just be a few points different. And keep in mind that even though a higher number is better, this doesn’t necessarily mean that there’s a hard cut off on who lenders will or will not lend money to.  It depends on a lot of factors and variables in addition to your credit score and credit report.

And that leaves us to the last portion I want to talk about and that’s how do you get your credit score. One way that you can is by applying for credit. My husband and I, for example, recently applied to refinance our home and with that process we were each mailed our credit scores but there are other ways you can get your score if you don’t plan on applying for new credit. Many major credit card and auto loan companies provide credit scores for their customers every month. It’s usually listed on your statement or can be found in your account. So check it out! You could be getting a free credit score already and have no idea. Many sites and services offer “free” scores and I put the word “free” in quotations because I want you to be careful. They may actually require you to sign up for a credit monitoring service. And beware of free trials, often if you don’t cancel in time you will be charged a monthly fee and we all know that we get busy and we forget about these free trials and then next thing you know, your free month is up and you’ve been getting charged this monthly fee on your credit card that you completely forgot about so just be careful. Many of these sites are credible just make sure you read all of the terms before signing up or handing over your payment information. You can also get your score from the credit reporting companies, these are TransUnion, Experian and Equifax.  All very credible and reliable sources. And this is where you can also get your free credit reports so if you visit annual credit report dot com you can get a free report from each of the three bureaus every 12 months. And I highly encourage you to do this. Keep an eye on your credit reports regularly to keep an eye out for mistakes and any signs of fraud. So not only is it a good idea to be regularly checking your credit report but it’s also a great idea to know your score. I would encourage you to find that out as well. Making smart financial decisions starts with being as well informed as possible. Alright, that’s all I have for you for this episode of Money Talk. Thank you so much for joining me.

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