Credit is a confusing concept. For most people, the most sensible way to manage finances is as follows:
Step one: Make money.
Step two: Save money.
Step three: Spend money, but never more than you have saved.
If only it were that simple. Instead, experts assert that accruing credit is the only way to survive the modern economic landscape ― and the only way to accrue credit is to have debts, which inevitably means incorrectly completing previously stated step three.
Fortunately, there is a safe and sane way to build good credit. Unfortunately, it relies on a thorough understanding of credit scores, including what they mean and how to find them, which most beginning penny-pinchers lack.
What Credit Scores Are
Throughout a person’s life, from their first credit card to their last, a credit bureau is tabulating a personal history of credit. Every detail of that person’s credit history, from late payments to cancelled credit cards, goes on this extensive report, which that person can view at any time. Employing this list in a series of various complex algorithms, credit companies generate numbers to help other lenders better judge that person’s creditworthiness ― and those numbers are credit scores.
Unfortunately, there are dozens of different companies that produce hundreds of types of scores, which means it is imperative that credit seekers are careful to compare like with like. Some models give more weight to specific industry-based credit activity, while others calculate an average score for an overall estimate of solvency. The most popular scoring model developers are FICO and VantageScore, but in truth, these agencies simply lend their carefully maintained algorithms to credit bureaus, who are the sole owners of credit reports.
Usually, algorithms pay attention to five main factors of credit: payment history, credit utilization, credit age, account mix, and inquiries. A credit score is never more than three digits, and for most systems, the higher the number, the more reliable the credit user. A FICO score of 850 is among the most prestigious, but it is estimated that only 0.5 percent of the consumer population has a chance at such an outstanding calculation.
What Credit Scores Are Not
Credit scores do not care what a person’s employment status is; they do not want to know a person’s net worth or annual income. The only thing that matters to credit scores is information on a person’s credit report. The fact is that credit scores are not designed to tell lenders whether or not an individual can make a payment, but instead, they serve to predict one’s likelihood of making payments. To fill this gap, most lenders inquire about a person’s employment and income (called “capacity metrics”) themselves, while they gain information about creditworthiness from the scores.
What Perception Does to Your Score
Just like Schrodinger’s cat, a person’s credit score changes when he or she views it ― sometimes. It is important for individuals to investigate their scores annually, to ensure that their credit is healthy and no fraud is taking place. However, there are different types of inquiries, and incessant viewing of one sort may have a profoundly damaging effect on one’s score.
In general, a person is free to check his or her own score at any time. Additionally, when credit card companies send “pre-approved” cards, they do not harm credit users’ scores. These so-called soft inquiries have no impact on scores because they do not indicate a person’s interest in taking loans or building credit. Conversely, when creditors seek scores due to a loan or credit card application, a hard inquiry occurs, which can put a slightly negative mark on your report.
What Life Events Do to Your Score
Every day, people grow older and make decisions that impact their lives, but these events do not usually impact their credit scores. For example, marriage forces people’s lives to merge, but credit reports remain happily single. Because credit history (and thus, credit scores) is linked with social security numbers, not names or family affiliations, they will not change at all after two people tie the knot. In fact, a spouse’s poor credit will have absolutely no impact on an individual’s credit score, but if the couple attempts to make a joint purchase, one person’s low score could make it worse for everyone.
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