Did you ever wish that you had a better credit score when you were applying for an auto loan, line of credit or mortgage? Having a higher score wouldn’t just make it more likely that you would be approved, but it could also mean you qualify for a lower interest rate, which will save you money.
According to a 2016 survey by NerdWallet, most Americans don’t understand how their credit score works or how common actions like closing old credit card accounts could affect their scores. In fact, the American Bankers Association found in 2013 that more than 58 percent of Americans don’t even know their credit score.
Lee Gimpel, co-creator of The Good Credit Game, a curriculum kit for financial educators, isn’t surprised. “Credit scores are pretty mysterious and can be really confusing,” he said. “Very few people learn about credit scores.”
But knowing more about your credit and making good credit choices has real benefits. “Better credit gives you access to better borrowing rates,” Gimpel said. “Consider two people who both buy the same $20,000 car on the same day, but one has significantly better credit than the other. One may pay 5 percent interest for that car loan, while the other may pay 10 percent. That adds up.”
Because of that, learning about your credit score can pay off. Here are five things that might surprise you.
YOU CAN GET YOUR CREDIT REPORT FOR FREE
Gimpel believes that it’s critical that you know your own credit score and review your credit report if you want to improve your credit.
“Finding out what to change or work on will probably mean digging into your credit report,” he said.
Everyone is entitled to free access to his or her credit report once a year. But a credit report isn’t the same thing as a credit score — rather, it’s a detailed report of your credit history and includes things like the number and types of accounts you have.
“It doesn't hurt your score if you check your own credit report, and it’s a good first step,” said Gimpel. “There are a number of bogus 'free' sites to do this, but the recommended free one is AnnualCreditReport.com.”
Want to check your credit score? Generally, it costs money. You’ll have to go to one of the three credit reporting bureaus (Equifax, TransUnion and Experian) and pay to get your credit score. You can also sign up for services that allow you to monitor your score every month or every few months to keep track of your improvements or to protect against credit card fraud. Some credit cards or banks now give a free score or a score estimate monthly. So if you’re in the market for a new card or bank, you may want to consider one that offers your credit score as a perk.
YOU SHOULD USE ONLY 30 PERCENT OF YOUR AVAILABLE CREDIT
Do you routinely max out your card and then pay it off at the end of the month? You might think that you’re building your credit rating by borrowing and paying back money, but you’re using too much of your available credit.
Gimpel suggest that you use only 30 percent of your limit each month. “If you get a card with a $1,000 limit, try to use only $300 of that,” he said. Any more and you will likely be penalized. If you need to charge more than that on your card, then you can get around the rule by paying off your card before charging anything else on it.
CANCELING A CREDIT CARD COULD TANK YOUR SCORE
If you’re trying to free yourself from credit card debt and improve your credit score, you might think that canceling your cards would be helpful. But Gimpel cautions against doing so since it could hurt your score in a variety of ways.
“First, it will decrease the amount of credit you have; that can change your credit utilization percentage,” he said. “In addition, your score is helped by having older cards with more history. When you cancel a card, you lose some of your track record.”
IF YOU’RE A DAY LATE PAYING YOUR BILLS, IT WON’T AFFECT YOUR SCORE
Accidentally paying your credit card a day or two late might mean that you will have to pay interest on your card, but what will it mean for your credit score? Not much, according to Gimpel.
“There are gradations of lateness when it comes to bills,” he said. “Your credit card company might charge you a late fee if you're a day late, but they won’t report you to credit bureaus until you’re 30 days late.”
YOU CAN FIX MISTAKES ON YOUR REPORT
If you find out the reason your credit score isn’t as high as you want it to be is that there’s a mistake on your credit report, it’s fixable. You can dispute any inaccurate entries on your report.
“To fix a mistake on a credit report is a pretty straightforward process. The credit bureaus provide forms to dispute erroneous entries,” Gimpel said. “Just bear in mind that fixing something at one credit bureau won’t fix it at others.”
The Federal Trade Commission estimates that one in four consumers find errors on their reports. Once you notify them of a mistake, they have 30 days to fix it.
While you can easily do this on your own, many universities, credit unions, military bases, housing authorities and branches of the U.S. Cooperative Extension Service run nonprofit credit counseling programs in your state that help people fix their credit reports.
Consider two people who both buy the same $20,000 car on the same day, but one has significantly better credit than the other. One may pay 5 percent interest for that car loan, while the other may pay 10 percent. That adds up.
Gimpel believes part of the reason it’s so critical to understand your score is that your credit score is now needed for all sorts of things, like job applications, rental applications or even signing up for a new cell phone plan. Luckily, it’s easy for most people to improve their score by making a few tweaks to their credit habits. These small tweaks can make a real difference and save people a significant amount of money over the long term.
“Understanding credit just a little bit better,” Gimpel said, “can help people make better decisions about their credit; it can dispel myths; and ultimately it can help them change their financial habits and improve their finances in really significant ways.”