Day 8: Your Credit Scores (30 Day Financial Wellness Challenge)

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Day 8: Your Credit Scores (30 Day Financial Wellness Challenge)Welcome to Day 8 of the 30-Day Financial Wellness Challenge.

Each day will comprise of financial exercises, some short and others a bit longer, to help you become financially fit. The goal is to tackle different aspects of personal finances one day at a time.

After the 30 days, you’ll have a stronger understanding of your financial health and an action plan to improve your financial wellbeing. Review Day 7: Debt-to-Income Ratio: Do you have too much debt?

On Day 8, it’s all about your credit scores.
 
Some of you may have been waiting for this particular challenge. I can understand why because there are so much media emphasis and conversations on credit scores. But, as you can see from the past 7 days, other financial numbers are vitally important when assessing your financial health.
 
In today’s challenge, the focus is on credit scores, not on credit or credit reports. I’ll cover those two topics when we move from analysis into the strategy.

Credit Scores and its Importance

There’s a debate that rages on about credit scores. However, I’m not going to tell you credit scores are useless or meaningless. They are a part of our economic reality. My goal with this challenge is to focus on what you need to know, how to get them, ways to improve or maintain scores, and when to stop worrying.

What is a credit score?

A credit score is a number, roughly between 300 and 850, that measures your creditworthiness. This score represents the answer from a mathematical formula that assigns numerical values to various pieces of information in your credit report. There are three main credit bureaus that collect your credit history–Experian, Equifax, and TransUnion. Information found in these reports is used in the scoring.

How is a credit score used?

It makes it easier for lenders to systematically make loan decisions. Credit scores are a reflection of how you’ve handled credit in the past and are used to determine your potential credit relationship in the future.

What is important to know

There are two things I want you to know–how your score is calculated and where the score falls within a range matters more.

Credit scores vary greatly. It can get confusing because one company has one score, you have another from a free app, and a lender has its score too. The reason is credit scores are calculated differently using different algorithms. That’s why you can have dozens if not hundreds of variations.

FICO versus VantageScore versus educational scores

There are two well-known scoring systems, FICO and VantageScore. They provide lenders and others access to scores using their proprietary algorithms. The information used to generate your score is obtained from the credit bureau. So, yes, the information reported on your credit file matters the most.

There’s also something interesting when reviewing FICO scores or VantageScore credit scores. You can get different FICO or VantageScores credit scores from different sources. That’s because a lender or another company used a different set of variables when calculating your scores.

Educational credit scores are offered by many credit monitoring apps and other companies. These scores may use a FICO, VantageScore, or another algorithm to calculate your score. They too use the information found in your credit report. With educational scores, the focus is on helping you understand how you’re using credit, how the information in your credit file is used to generate a score and provide resources to improve your scores.

What impacts your credit score?

The following can have an impact on your credit score:

  • Your bill-paying history
  • The number of accounts you have and what kind
  • How much of your available credit you are using
  • How long you have had your accounts open
  • Your recent credit activity
  • Whether you have had a debt collection, foreclosure, or bankruptcy, and how old these are

Credit Score Ranges and Why it Matters

Your score is only important as it relates to the score range used to set interest rates and approval of your credit application.

Within a range, consumers may fall into different categories from bad to excellent credit.

  • Excellent Credit: 750+
  • Good Credit: 700-749
  • Fair Credit: 650-699
  • Poor Credit: 600-649
  • Bad Credit: below 600

This is just an example to figure out where you fall within a credit range. But lenders and companies set their criteria of what score is deemed acceptable. These creditors modify the ranges to determine the level of risk they are willing to take. It’s used to assess the interest rate and fees given your credit risk.

Learn more: Is your credit score good or bad?

What factors are used to calculate credit scores

The exact information used by credit scoring providers, such as FICO, to calculate your credit score is top secret, but there is some publicly available information. FICO has shared the following:

Payment History (35%)

The largest percentage because paying on time is important for lenders to know.

Amounts Owed (30%)

Also known as capacity. It’s based on the amount of outstanding credit you have against your available credit limits.

Length of Credit History (15%)

How long you’ve had credit plays a role in your credit score. Longer credit histories are viewed positively. Adding new accounts can lower your overall credit history length.

Types of Credit in Use (10%)

This is based on a mixture of credit such as credit cards, personal loans, mortgages, auto loans, etc. A good variety is generally accepted as strengthening credit scores.

Account Inquiries (10%)

Applying for credit impacts your credit score and having too many recent loan applications (or inquiries) can have a major negative impact. Apply for credit when necessary.

Read more: How are credit scores calculated

What does your credit score reveal?

Your credit scores help you quickly determine how you’re managing credit. It’s a financial wellness number focused on credit health. It may also signify a need to investigate your credit file if scores are lower than expected.

Day 8 Assignment

Let’s get your credit scores

  1. Let’s get your free credit scores.
  2. We’ll discuss these scores more thoroughly when we request your actual credit reports.

Your Credit Scores

Credit ScoreGet Your Score
Free Credit ScoresWhat’s your score?
  Credit KarmaGet a free score
  Credit SesameGet a free score
Free (Banks)
  Creditwise by CapitalOneLearn more
  DiscoverLearn more
Free Credit Bureau
  Experian Free ScoreLearn more
Paid Credit Scores
  FICO Score (Paid)Get your FICO

Why is getting your scores important?

  • A realization that you’re more than your credit score.
  • Now, you know how many actual credit scores exist.
  • And ways to improve your score so you can qualify for better rates or no downpayment services.

Additional Reading:

Resources:

  • Credit Karma is the innovator that pushed the industry into offering free credit scores. They offer 2 free credit scores from Equifax and TransUnion. Also, they offer a comprehensive list of tools to help improve your credit health.
  • Credit Sesame is not far behind in offering free scores with helpful tools and credit recommendations. Credit scores are from the TransUnion credit report.
  • Build or improve your credit with a credit-builder account offered from Self. Self allows you to save money and (re)build credit without checking your report. Good for those new to credit, little credit, or need help improving credit scores. Learn more with our Self Review.

Next Daily Challenge: Day 9  – Financial Health Check: What do these numbers mean?

Frequently Asked Questions

Are these free credit scores legit and not scam?

I’ve used and reviewed these apps myself. They pass me no scam and legit service test. You can review the terms and conditions with each provider. One key thing to remember is to never input your credit card for a “free” service. None of the services, aside from FICO, above require credit card information.

Will getting my credit score hurt my credit?

No. These credit tools perform a soft pull which doesn’t impact your credit score. Learn more about hard and soft credit inquiries.

Why do I need to pull so many credit scores?

The exercise of requesting free scores from multiple places emphasizes today’s challenge that credit scores are varied. It will also help you understand why the information found in your credit report is what matters the most.

What if I find out my credit score is wrong?

Technically, your credit score isn’t wrong. It only reflects the information found in your credit report. In the event, you discover your credit score is lower than expected. Check the information shared in the app, usually called a credit report card. Then, review your credit report thoroughly using AnnualCreditReport.com. You can learn more about how to request your free credit report on the only federally mandated website.

Jason Vitug

Jason is the founder of phroogal, creator of the award winning project Road to Financial Wellness, and author of the bestseller and New York Times reviewed book, You Only Live Once: The Roadmap to Financial Wellness and a Purposeful Life.

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