I hate to admit this, but like many young people I had never once checked my credit report or my credit score. I just assumed that everything was fine and that this information wasn’t really necessary until I required a loan for a home or to purchase some sort of exotic animal. What I didn’t realize is that a small, unknown outstanding debt or being the victim of identity theft could be crippling my credit and stealing my dreams… and I wouldn’t even know it.
How your credit score is calculated:
- 35% payment history (like late payments – this is the most important factor!)
- 30% amounts owed (how much is owed and how much credit is available)
- 15% length of history (how long you have held an account)
- 10% new credit
- 10% how many different types of credit you have (credit cards, loans, utility bills)
Credit scores range from 300-850, and lenders use this number (as well as other factors like your age and salary) to assess how risky it is to lend to you, and from there they can decide how much interest (aka how much to screw you) to charge on your loan.
It’s important to have this information NOW because a good credit score can save you a ton of money, so if there is something inaccurate, or a way to improve it – you want to get on it right away.
For example:
On a $200k , 30 year mortgage:
A credit score of 760-850 (best) = interest rate of 4.384% = $359,867 total payments with interest
A credit score of 620-639 = interest rate of 5.97% = $430,427 total payments with interest
This is a difference of $70,560!!
This freaked me out, so I went ahead and checked my credit score:
Ok, not bad. This puts me in the second highest bracket, or “good” level for credit score ratings. This information ruined my day. I have never made a late payment on my rent, utilities, or credit card… my credit should be “excellent” or “freakin’ unbelievable”. The problem is that those are my only sources of reference. Living in NYC, I have no mortgage, car payments, and because education is subsidized in good ol’ Canada, I have no student loans.
How I could improve my credit score:
– Open another credit card
– Call Visa and ask them to increase my spending limit. This would improve my “credit utilization rate”. For example, if I constantly spend about $2k on my card and my limit is $2500, even if I pay it off in full every month, the fact that I’m using all of my credit could hurt my score (since this is the second most important factor)
– Resist closing any cards in the future. Instead, set them up with automatic payments to pay for a recurring bill or subscription to keep it active.
The moral of the story is check your credit. Once a year, you are granted free access to your credit report on www.annualcreditreport.com
Your basic credit score is also available for $15 from sites like www.myfico.com
If your credit score sucks, check out my life-changing article on 12 Ways to Improve Your Credit Score NOW.
There is usually always something that can be done to improve your score. Don’t let ignorance ruin your chances at maybe opening your own business someday. FYI, If you steal my bacon-smelling soap idea, I will track you down and make you give me free samples.
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