3 Things Nobody Tells You About Your Credit Score (But Should)
It's expensive to have a crummy credit score.
The truth is that folks who either have poor credit or little credit get the worst of everything when it comes to credit cards: higher interest rates, more fees, smaller sign-up bonus, fewer special perks. It can end up costing you thousands of dollars during your lifetime just in higher interest rates on mortgages, credit cards and car loans.
Most people understand the consequences of crummy credit, at least to some degree. What's far less clear is exactly what a credit score is all about and just how people can change their crummy credit for the better.
Here a few things about credit that you might not know.
[See: 12 Habits to Help You Take Control of Your Credit.]
It's not as complicated as you might think. People tend to think of credit as this mysterious, complex beast that is impossible to understand. That's not entirely incorrect. There are plenty of nuances and subtleties to the credit-scoring formula that can be super confusing. However, at a basic level, credit scores are far less complicated than people might believe.
We overthink credit to a big degree. Credit is really about three things:
-- Paying your bills on time every single month.
-- Keeping your balances as low as possible.
-- Not applying for too much credit too often.
Do those three things over and over -- lather, rinse, repeat -- and your credit is going to be just fine. Obviously, those things can be easier said than done, especially keeping balances low, but if you can manage it, you'll be on your way to a lifetime of good credit.
[See: 12 Simple Ways to Raise Your Credit Score.]
It doesn't always matter. Your credit score is very important, except when it isn't. If you're planning to apply for a mortgage, car loan or credit card sometime soon, you definitely need to be mindful of your score. That's especially true if your score is teetering on the edge between good and great or good and not-so-good. In that case, you either need to make moves to better your score, or at least avoid doing anything that can harm your score.
Most of the time, however, there's no need to obsess over your credit score. If you're not applying for a loan, looking for car insurance or trying to rent a new apartment in the near future, you probably don't have to think too much about your credit score. Simply keep paying your bills on time and minimizing your balances. Then, when the time comes again that you need a good credit score, it'll be there waiting for you.
The higher the score, the harder it can fall. So, you finally got the credit score of your dreams. You worked so hard for it, paying down those big balances and getting every payment in on time, and now it is time to relax and enjoy the fruits of your labor. After all, what took so long to build will take just as much time to tear down in case things go badly, right?
Wrong. You could be one late payment away from kissing that awesome credit score goodbye.
FICO and VantageScore, the two leaders in credit scoring, typically don't give too many specifics about just how much a credit mistake can damage your credit score. (There are too many other variables, they say. Every individual case is different.) However, they have indicated that someone with a great score might take a bigger credit hit from a mistake than would someone with less-than-perfect credit.
[See: What to Do If You've Fallen (Way) Behind on Your Credit Card Payments.]
In one example, FICO indicates that a person with a 780 credit score could see his score fall more than 100 points as the result of one single 30-day late payment. A foreclosure could drop the person's score by 150 points.
By contrast, someone with a 680 credit score would see a 60- to 80-point drop after a late payment and around a 100-point drop after a foreclosure. Those decreases are big and would be potentially devastating to someone with already imperfect credit, but they would be smaller than the drops seen by the cardholder with a 780 score.
Whatever your score, the bottom line is that mistakes can kill your credit. The good news, however, is that many of those mistakes are avoidable. For example, you can make late payments a thing of the past by setting up autopay with your bank. Just be sure that you set the amount to pay more than the minimum each month. Otherwise, your debt can grow faster than you'd imagine.
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