Three crucial digits can profoundly affect your financial life, including the interest rates you pay on mortgages or car loans and whether you can actually have that credit card you were invited to apply for.
Credit scores take into consideration the mix of credit you have (say, mortgage, credit cards and car loan), your payment history, how much of your available credit that you are using and other factors. Lenders use them to make an educated guess at how likely you are to repay any credit they extend to you. But knowing that they’re looking at part of your life and evaluating it might make you feel as if you are standing financially naked and being given a grade.
Actually, it’s not quite as bad as all that. There are parts of your personal and financial life that credit scores do not factor in, and you may be relieved to know that your credit score does not reveal:
Your income. That’s right. Although you will almost certainly be asked about this when you apply for credit, it’s not part of your credit score. Alas, if you get a raise or promotion, that won’t be reflected in your score, either.
Your employment status. If you lose your job, you may be worried that you will lose your good credit, too. Actually, losing a job can affect your score only indirectly, meaning if your loss of income causes you to not make payments as agreed.
Your marital status. You can get married, but your credit scores won’t commingle with your spouse’s unless you jointly apply for credit.
Your age. Whether you are 28 and just starting on your career or 68 and mostly retired, your age is not factored into your score. It can indirectly affect your score, however, because the length of time a credit line has been open is reflected in your score. Thus, the younger you are, the more you will be penalized for “new” credit, and the older, the more you stand to be rewarded for longstanding accounts.
Where you live. Some states have higher average credit scores than others, but that’s not because you lose or gain points based on geography. Every state has high-scorers and low-scorers. Your credit behavior is what determines your score.
The source of your debt. If a health problem, divorce or other life crisis triggered a change in your payment history, the score itself could change, but the reasons for it are not disclosed.
The interest rates you are paying on credit lines you have now. If you’re paying an above-market rate, a prospective lender won’t be able to determine it from your credit score. (And although your credit score will affect the interest rate you are offered, the reverse is not true.)
Because your score makes such a difference in how much you will have to pay to borrow money, you’ll want to be vigilant. You can do that a couple of ways. One is to buy a score from one of the three credit reporting agencies — Equifax, Experian and Trans Union — or you can get Credit.com’s free Credit Report Card, which updates your credit scores monthly.
Also, by law, you are entitled to one credit report per year from each of the three credit reporting agencies. Because your credit score is derived from information in your credit reports, it’s important to make sure that information is accurate. If you find an error, you should dispute it. Once you’ve ensured that the information in your records is up to date and factual, you should monitor your credit report to be sure it stays that way.
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