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I’ve been mad at credit scores for a while. And you should be too. Why? Because credit scores are a business—a business that runs our lives. I don’t know about you, but I don’t like it when someone decides to create a business based on my personal information and borrowing habits, but then says, “Oh, no, you can’t see what I have on you. Pay up first!” Not riled up yet? Let me help.
How long can you go through your day before seeing or hearing an ad for credit scores? We’ve become credit-crazy people! The more our credit scores are used in our lives (from dictating how expensive borrowing money will be, to getting—or not getting—a job because you’re deemed too much of a potential risk, to determining insurance rates for our cars and homes) the bigger the opportunity to sell us our credit scores and the more credit scores “pop” up.
In reality, you only need to know your score when you apply for a loan, insurance or a job. After all, credit scores are shorthand for our credit reports. And thanks to the Fed, we get to see our credit reports for free once a year so you know where you stand. But we don’t get to see our credit scores for free unless we’ve been denied a loan or line of credit because of it (a “freebie peek” that only went into effect this year due to amendments to the CARD Act). Considering that, how the heck are you supposed to know what your score is?
To make things even more confusing, did you know that each credit-scoring business has a different way of creating their (our!) number? Lenders then pick and choose which scores to use to judge your creditworthiness. In addition to FICO scores, there’s now a TransUnion score, CreditKarma score, insurer’s score (scores created by insurance companies), and more and more are created seemingly every week. So how are you supposed to know which score lenders are using?
You must know: The majority of lenders and insurers use only your FICO scores (you have three), and then, as the scores differ, some pick the middle one, some the lowest. When in doubt, ask which score is being used.
Saving the best for last: Companies don’t follow rules about updating your credit report and they don’t have a system to catch errors (many of you have probably learned this the hard way). Some large lenders have finally gotten their just desserts for misreporting (or not reporting at all) changes to the terms of your loan, such as a higher credit limit.
For example, let’s say that you started a certain credit card with a low limit of $200, but in five years that limit turned into $10,000. What if the credit card company never reported that change and you now owe $2,000 on that card? Well, on your credit report—which would be reflected in your credit score—you’d now look way, way overextended and you’d have a low score. What to do?
You must know: Unfortunately, it’s become our job to stay on top of our credit reports and, therefore, our scores. Scour your reports for errors (at least once a year, for free) and clean up the “mess” so your credit scores more accurately reflect your credit.
Credit scores. Can’t live with ’em. Can’t live without ’em. So, you might as well stay on top of them!
Got questions for our financial expert, Carmen Wong Ulrich? Send them to firstname.lastname@example.org.
How do you monitor your credit score? Chime in below!