With Halloween in our rearview mirrors, I know that the last thing you want to hear is another scary story about murderous ghosts or calls coming from inside the house; that's why today, I am bringing you a story about something far more terrifying — a story about managing your credit in a mature fashion! Ahhhhhh (cue cackling witch voice, sound of breaking glass). Submitted for the approval of the Midnight Adulting Society, I call this story, "The Tale of the Accidentally Screwed-Up Credit Score."
About a decade ago, I had a pretty good credit score. This was a freak accident, of course — I had just forgotten about the credit card I applied for my freshman year of college; because of this, I never amassed any debt, and kept my credit shiny and new. And so, when I checked my credit score for the first time right after I graduated, I was pretty impressed with myself. I proceeded to spend the next few years thinking that I was a financial genius for sticking my credit card in an old purse and then forgetting about it for three years.
So imagine my surprise several years later, when I decided to check my credit score before applying to rent a new apartment — and found that my score had dipped 200 points. It had dropped significantly since the last time I checked, despite the fact that I still didn't have any major debt, and paid my bills on time, as far as I knew (this is called "foreshadowing").
What the hell happened? What followed was a crash course in learning what credit scores actually are, how they're determined, and what we can do to fix them after we mess them up. Read on, and make sure that my suffering was not in vain.
What Is A Credit Score?
To start with the basics: a credit score is a three digit number that is supposed to reflect your financial responsibility. Think of it as a GPA for your money. It exists so that potential lenders can easily determine whether or not you're likely to pay back a loan in a timely fashion.
And how is that score created? By taking your financial history into account — including elements like whether you pay your bills on time, whether you've maxed out your credit cards, and how long you've had your own bank accounts and credit cards. They then take all this information, and apply a formula to it. This formula yields a number, which falls on a scale between 300 and 850 — and voila, you have your credit score.
The most common of these formulas was developed by a company called the Fair Isaac Corporation; the number it yields is called your FICO credit score. Your FICO score is typically the one you'll examine when trying to get a handle on your own credit, though there are many different kinds of credit scores out there, used by different companies. Though your credit scores can differ between these companies, the good news is that they rarely differ more than 50 points — so you'll still have a good idea of your general financial health from just looking at your FICO score.
Why Should You Care About Your Credit Score?
You may be thinking, "Who cares about any of this crap? I'm years away from buying a house, a car, or anything more serious than a platter of taquitos, honestly." But credit scores are relevant to us bus-riding, student-loan-paying, apartment-renters, too; it can influence what kinds of interest rates you get on your credit card, and even whether you're able to rent certain apartments.
As Credit Karma notes, "A low score could cause landlords to deny you outright or to impose additional conditions on your tenancy," a statement which lines up with my own experience — I've had my credit checked every single time I put my name on a lease. And I'm not talking about some kind of fancy condo — bad credit nearly kept me out of a street-level apartment where I could basically hear my next-door neighbors fart.
Where Does Your Credit Score Come From?
There are three major credit reporting agencies in the U.S. — Experian, Equifax, and TransUnion. They keep track of all of your financial information, like whether you have outstanding balances on your credit cards, and create credit reports based on it — and then they use the previously mentioned formulas to determine your credit score. Experian, Equifax, and TransUnion are all distinct companies, which means that you actually don't have a single credit score — you have three. Your scores at each company will usually be very similar, though.
Though it may seem, at first blush, that paying your credit card on time would be the only thing that could really impact your credit score, there's actually more to the story. For example, when I started trying to figure out what had gone wrong with my own credit score, I realized that I had done some pretty serious damage by just forgetting to forward my mail.
When I moved out of my first post-college apartment, I realized a few weeks after moving that I hadn't left a forwarding address at the post office. But I decided it didn't matter — what the hell did I ever get in the mail, anyway? Answer: my electric bill! A final electric bill for $50 got sent to my old address, over and over, before the electric company handed it over to a collections company — who also sent bills to my old address over and over. Eventually, the collections company gave up contacting me, realized they were never gonna get that $50 and knocked a few hundred points off my credit score instead. Those lost points would end up costing me way more than $50 in credit card interest rates. Whoops.
What's A Good Credit Score?
The median credit score is 720. People with scores over 720 are said to have "good credit;" people with scores under 620 are more likely to have trouble getting good loans or have to pay higher interest fees.
Does a low credit score mean that your life is ruined? But your score can impact your life. For example, my low score made it tougher for me to get that apartment I wanted. We ended up only putting my roommate's name on the lease, because her finances were in better order than mine.
What's The Difference Between A Credit Report & A Credit Score?
A credit report is a record of all your financial activity over the past few years — so it's a great resource to make sure that no one has stolen your identity and opened up any credit cards or bank accounts in your name. Your credit report contains the raw data that is used to calculate your credit score — however, your credit report does not actually include your credit score itself.
You should still get a copy of your credit report every year, though — it is important to make sure that, say, no nefarious hackers have lifted your credit card information in order to fund their niche porn site about people who like to have sex on top of a pile of paninis. You can get a free copy of your credit report once a year at AnnualCreditReport.com, the only authorized free credit report site run by the Federal Trade Commission. This site offers a separate annual credit report from each of the three credit reporting agencies. The Federal Trade Commission's Consumer Information website notes that AnnualCreditReport.com is the only place out there that will give you a completely free copy of all your credit reports — other non-government sites that offer copies of your credit report often have sneaky ways of charging you money, like signing you up for a "credit tracking" service with reoccurring monthly charges.
How Do You Find Out Your Actual Credit Score?
But let's get real: you want to know your credit score now, not annually. The bad news is, there's no actual free way to find out your credit score without signing up for that annual report. Some sites will give you an estimated FICO credit score for free, but that's just an estimate — it's not the same as the number than banks or credit card companies will get when they look at your file. For the real deal, you'll have to pay up.
Some credit cards companies like Discover offer free FICO credit scores for customers; but if you don't have one of those cards, you'll have to buy your credit score on your own, from a company like myFICO.com.
When buying your credit score, be careful that you're buying it from a reputable company. And no matter where you buy it from, keep an eye out for added services that the site may be adding to your bill. A lot of sites that sell credit scores also offer "credit monitoring" or services that supposedly protect you from identity theft; these might be slipped on to your bill without you noticing. According to the U.S. Consumer Financial Protection Bureau, you can't be required to buy any kind of add-on service when purchasing your credit score, and you shouldn't buy your credit score or any other information from a site that forces you to.
Can You Fix Your Credit Score?
So you navigated your credit report, avoided all the random add-on charges, and finally saw your credit score ... which is pretty low. What happens now? Is your life permanently ruined? Will you have to live in a shared off-campus apartment with a philosophy major named "Rando" and his 19 Reservoir Dogs posters until you die? Will you never get laid again?
Real talk: having bad credit sucks. I got depressed when I found out about mine, because it made me feel like I was doing a bad job at taking care of myself (so basically, exactly the same things I felt when I found out I had HPV). But much like HPV, bad credit heals over time, as long as you're ready to start getting your act together.
Your financial mistakes only stay on your credit report for a limited time — almost everything, from late payments to foreclosures, stop being a factor on your credit score after seven years. I'm eight years past my brain fart about the electric bill, and happy to report that my credit is finally healthy again. So if you commit to paying your bills on time, paying down your cards, and organizing your finances, your bad credit score can one day be a faint memory that you only dig up when writing smarmy articles about financial responsibility.
Images: GotCredit/Flickr; Giphy (7)