One of the biggest adulting moves you can make? Working on your money. From budgeting to investing, financial planning is a holistic effort you can use to make your long-term goals a reality. But there’s one part of financial planning that’s often overlooked: credit scores.
Credit scores can make or break your financial goals. Years of saving can still turn up a denied mortgage application if you add a bad credit score to the mix.
The best way to ensure your credit is on track for success is knowing how it’s calculated.
What raises your credit score? What does it mean if you have no credit? Will your marriage (or divorce) impact your credit rating? When it comes to credit, there always seems to be more questions than answers.
That’s why we’ve compiled 15 common questions financial advisors hear about credit – and the answers you’re looking for.
15 Common Questions About Credit Scores
Ready to make the most of your credit? Here are the answers to 15 common questions about credit scores, including tips to raise your number and reach your goals.
1. What is a credit score and why does it matter?
Here are the basics:
Your credit score is a number lenders use to decide how likely you are to pay back a loan on time. Your score can range anywhere from 300 to 850 – the higher the number, the more likely you are to get approved for lines of credit.
Why does it matter? Well, credit allows you to make big purchases without having to have all that cash on hand immediately. With good credit, you can secure a mortgage loan to purchase your dream home, or to finance your new car upgrade.
If your financial goals include borrowing money to afford large purchases, you’ll probably want to pay attention to your credit score.
But it’s not just borrowing money – your credit score impacts a lot of things, like getting a cell phone, setting up utilities in your name and even getting a job. While employers can’t access your actual score, they can pull your credit report, which will tell them if you have outstanding debts or anything else that may help them get a better picture of who you are.
2. What impacts my credit score most?
There are several factors that determine your score: credit utilization, number of open accounts, amounts you owe, etc. But the most important factor by far is your payment history.
Your payment history is a record of each time you’ve paid back a loan on time, and each time you missed the mark and forgot to submit a payment. Auto-payments are so popular for a reason – not only do they make it easier to pay bills, they also help ensure your credit doesn’t take a hit.
A good rule of thumb? Pay your bills on time at least 99 percent of the time to keep your credit in good shape. That means for every 100 payments, you should only have one late payment. A payment record of 98 percent and below will start to have negative effects on your overall credit score.
The best rule of thumb? Get your loan payments in on time, every time.
3. What score do I need to get a mortgage?
This is a tricky question because while mortgage lenders consider your credit score, it’s not the only factor that determines whether your home application gets approved. Lenders will also look at your debt to income ratio and your down payment, among other things.
However, for a conventional mortgage loan on your next home, lenders are typically looking for a credit score of 620 or higher. Anything lower than that will likely impact your application.
4. Is no credit a good thing or a bad thing?
You may have been told to avoid borrowing money or using credit cards – and for some people, that’s good advice. But it leaves you with no credit history, which is almost as bad as bad credit in the eyes of lenders.
Lenders want to know that they will get their money back before they give it to you. Having zero credit history makes you a giant question mark to lenders. They have no way to predict whether you’re responsible with borrowing and paying back money.
It might seem counterintuitive, but borrowing money via credit cards (and paying them back on time each month) can help you gain credit and show lenders you’re a responsible borrower.
Even with no credit history, there are plenty of options for entry-level credit cards you can use to help build your credit profile.
5. How often is my credit score updated?
There are three major bureaus (Equifax, Experian and TransUnion) that report credit scores in the United States, each with their own systems for calculating and updating credit reports.
However, you can expect to see your score updated about once a month – or whenever your lender has new information to submit about your payments.
6. Where can I check my credit score?
There are a plethora of online services that allow you to check your credit score completely free, such as Credit Karma, or you can do it directly through each credit bureau.
U.S. citizens are also entitled to one free credit score each year per bureau. You can choose to request these scores one at a time or all together.
Contrary to what you may have heard, requesting your credit score does not hurt your credit score. Like any rumor, this one is slightly based in the truth: Every time someone else inquires about your credit, it impacts your credit score. Of course there’s no way to avoid having some inquiries into your credit whenever you apply for a credit card, buy a car, sign up for a phone or whatever. Just resist the urge to apply for every credit card that offers you a discount off your purchase if you just fill out this simple application – we’re looking at you, Kohl’s and Amazon. See question 9 below for more on this.
7. If I get married or divorced, will my credit score change?
Not necessarily. Your credit score doesn’t care if you’re a proud single lady, happily married or recently divorced.
However, marriage and divorce often include a rearranging of assets and accounts. Getting eloped or separating from your spouse won’t directly affect your score, but how you choose to combine or separate your finances can have an impact.
8. I paid off my student loan. Why did my score drop?
One factor for credit scores is your age of accounts – basically how long you’ve been borrowing and paying off loans. The kicker is that once you pay off a loan in full, it disappears from your credit age, often lowering your average age and therefore your score.
It doesn’t make sense and seems unfair, but paying off a loan can actually hurt your score.
9. What is a credit inquiry?
An inquiry occurs when a lender checks your score – they’re inquiring about your credit score. There are two types of inquiries: hard and soft.
A hard inquiry happens when you apply for credit, and can stay on your report for as long as a few months to a couple of years. Too many hard inquiries in a short time span can actually ding your overall score, because it indicates that you’re looking to take on more debt.
A soft inquiry happens when someone checks your score but it’s unrelated to a loan application. Maybe your credit card company wants to know what other cards you’re a good fit for before they reach out to you with offers. These “soft” inquiries don’t impact your credit score.
10. Can I help my child build credit?
Yes! You can add a minor as an authorized user on your credit card, which can help them build credit history and age before they ever need to apply for a loan.
One thing to keep in mind: This is only a good idea if you have a good handle on your credit already. If you struggle to keep up with payments, you may actually hurt your child’s credit while trying to help.
11. I see multiple different scores, and they’re slightly different – what’s the deal?
Remember those three different bureaus we mentioned earlier (Equifax, Experian and TransUnion)?
In addition to different scoring models (a.k.a., FICO and VantageScore), the reason behind any discrepancies likely lies in the fact that these bureaus don’t always have the exact same information. Maybe your credit card company keeps TranUnion up to date on your account balance, but is a little slower reporting to Equifax. Regardless, you shouldn’t expect to see too huge of a gap between your scores.
12. What is credit utilization?
Credit utilization is the percentage of your overall available credit that you’ve borrowed.
A great rule of thumb is to keep your credit utilization under 30% or so. So if your limit is $1,000, you should only use about $300 of that. A high credit utilization percentage can lower your overall credit score.
13. How long will it take to improve my score?
Certain parts of your credit report will remain longer than others. For example, a hard inquiry might disappear within a few months, while a late payment will stick around for seven years.
If you’re looking to raise your score, consistency is key. Make your payments on time, keep your credit utilization low, and be judicious with those hard inquiries. Be patient and don’t compare yourself to others – a 50-point hike for them will likely take a different amount of time for you.
Credit is an important part of any healthy financial plan. To gain specific insights into raising your credit score, consider partnering with a financial planner.
14. Have credit scores always been a thing?
Credit reporting has been a thing for a long time, with companies like FICO creating unique scoring systems for individual companies. In the 1980s, FICO created a general scoring model intended for use across all industries.
Mortgage lenders caught on to the new system by the 1990s, securing the FICO model as a statement piece in the world of lending even to this day.
15. Will credit scores always be a thing?
No one has a time machine to peer into the future and answer this one, but it’s generally accepted that there will always be some sort of credit scoring system. As tech evolves and our processes for credit change, it’s likely that we’ll also see updates to the current system.
However, there is currently nothing on the books that indicates a major overhaul of credit scores. You can visit usa.gov’s credit and debt information page to stay updated.
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