What is a Credit Score?
Credit score is a three digit number that is generated using a complex algorithm using information from your financial history. The idea is that this number is useful in predicting your future financial behaviors based on your past financial behaviors. There are several types of credit scores, but the most common are the FICO, Experian, and Vantage Score.
These scores come a number of factors, including payments, debts, new credit and the types of credit used. Your credit scores is usually determined more by recent credit history than past ones. But all of your credit history is going to have some impact on the final score.
Payment history has the largest impact on your score. If you’re in the habit of making late payments, chances are your score is going to hurt. Debts hold almost as much weight. If your debt is extremely high for extended periods of time, it may hurt your credit report as well. Credit scores don’t have a guide and the actual algorithm is not readily available. This makes it difficult to stack your credit score the way you want it to. Instead, you need to have good credit history.
How can I check it?
You are entitled to check your credit score for free. The Fair Credit Reporting Act states that reporting agencies are required to provide this type of information for you once every twelve months. Even if you are using a paid service, make sure to take advantage of your free credit score report.
You have several options to check your credit score. There are websites that provide free credit score reports. Some offer more information than others. Paid sites even offer credit monitoring, which keeps you up-to-date on everything. AnnualCreditReport.com is a good place to start. They offer a free credit score for all three major types. This should give you a good idea of where your credit stands.
If you’re interested in a monitoring service, MyFICO.com’s forum has an excellent resource of all the different monitoring services available.
Why does it matter?
Your credit score is important especially if you plan on buying a house, financing a car, or starting a business. Lenders will use your credit score and history to determine if you’re likely to make your payments. This applies to any line of credit, even credit cards and applying for loans.
When you’re trying to rent a new home or apartment, there’s a fairly good chance that your potential landlord is going to need to do some credit check. This is especially true in the case of properties that require longer leases, 12 months to 2 years. If they take a look at your FICO scores and find out that you still owe your last landlord money or is not a good payer, then they won’t approve your lease.
Some landlords set some arbitrary credit score number and even though you haven’t been delinquent on your rent, your score just doesn’t add up. This is equally true when you have no credit at all and have little to no credit history to report.
Surprisingly, even utility services check credit scores. They will sometimes make you pay hundreds of dollars as a deposit due to little or poor credit scores. This may not be a huge hit, but it can still be a snag in the road while moving into a new home.
When applying for certain jobs, sometimes you will be asked to comply to a background check. Why this includes your credit score is sometimes questionable. Certain jobs that involve handling financial decisions do that. Even positions fast food restaurant managers are subjected to this type of credit check!
Of course any loan or credit card you apply for are also subjected to credit check. A credit card company will not give you $2500-5000 limit if you’ve never had any credit card. Likewise, if you’ve defaulted on loans in the past, you can’t really a bank to shell out money whether it’s for a house, car, or business.
How can checking credit score help me avoid identity theft?
The added benefit of checking your credit score is to help avoid identity theft. Any strange or unexplained credit history could easily be a sign of identity theft. In most cases, this will require you to monitor your credit score more than once a year. By keeping tabs on your credit score, you can also keep tabs on suspicious behavior.
This may seem like a lot of work for something that is not an issue, but consider how identity theft works. First of all, it’s often difficult to trace the culprit. Secondly, they are adding debt to your finances. It’s sometimes difficult to prove that they were not your mistakes. Even if you do manage to get out of paying for the debt accumulated by identity thief, your credit score may not get repaired.