Is it easier to pay your bills when you’re rich? Of course it is. Does being rich automatically mean that you can or will pay your bills on time? No it does not. Being rich means that you have the resources to cover your expenses, but it doesn’t mean you have the discipline or desire to pay your bills on time. And paying your bills on time is the single most important factor the credit bureaus use to determine your credit score. In fact, payment history makes up 35 percent of your credit score.
What is “credit” and why is it important? Credit is a contract between you and a lender where you receive something now and agree to pay for it later. The lender can be a bank, an insurance company, a department store, a consumer finance company, or anyone who provides a service but doesn’t get paid up front for it. Lenders decide to give you credit if they believe that you will pay them what you owe them based on the terms of your agreement. If they suspect that you won’t pay them back, they won’t lend you the money. Or if they are willing to accept the risk that you might not pay, they will charge you a higher interest rate to compensate them for the additional risk they are taking on.
How do they determine this before they’ve ever done business with you? They look at your track record for paying other lenders. If you’ve been good at paying your bills in the past, then chances are you’ll be good at paying them going forward. And that’s where your credit score comes in. Your credit score is the numerical measurement of how good you are at paying what you owe. It’s as simple as that.
The score looks like this:
||750 – 900
||700 – 749
||650 – 699
||600 – 649
In addition to your payment history comprising 35% of your score, the other factors are:
- the level or amount of debt you have (30%)
- the length of your credit history (15%)
- inquiries into your score (10%)
- your mix of credit (10%)
Any account that your name is on—individually or jointly—is included in the calculation of your score. And you have your own score, separate from your spouses. That means if you have a joint loan with your husband, and you are not making the monthly payments on time, both of your credit scores will be negatively affected. Likewise, if you are regularly meeting the monthly payment deadlines, both of your scores will reflect the positive activity.
For better or worse, in recent years, the credit score has also become a reflection of, not just how well you pay your bills, but also how responsible a person you are. As a result, prospective employers may check your score as well as other non-lenders such as auto insurers, homeowners’ insurers, landlords, utility companies and government agencies (to whom you are applying for a license). In most cases, you give them permission—whether you’re aware of it or not—when you fill out an application or apply for services, but credit card companies and insurance companies are allowed to check your credit without your permission in order to prescreen you for promotional offers.
So, as long as you’re able to borrow money, why would you care if your credit score is not as good as it could be? After all, just because your score isn’t perfect, doesn’t mean no one will lend you money or otherwise do business with you. Each company has its own guidelines regarding the minimum score it is willing to work with. However, consumers with the highest credit scores get the best interest rates. The higher the risk you are considered to be, the higher the interest rate you will pay on your loan. In contrast, the lower the risk you are (because you have an excellent credit score), the lower the interest rate you pay.
This was reportedly an issue with the recent Wells Fargo scandal. Client accounts were opened without their knowledge, and fees were charged on those accounts. Because the customers didn’t know to pay the fees (because they didn’t know the accounts existed), the fees racked up and were then reported as delinquent on customers’ credit reports. This ultimately cost them unknown amounts in higher interest rates charged by lenders for having the negative factors in their credit scores.
Moral of the story? Check your credit report regularly—no less than once a year—to make sure everything is in order. Many credit card companies will allow clients to check it for free and each of the three major credit bureaus (Experian, TransUnion and EquiFax) provide it once a year at no charge. But you can also access yours through certain websites at no charge. Even if you have to pay for your report, it’s relatively inexpensive. You can see the prices in the table below. Be sure to get your score and—at the same time—the report that justifies the score so you know what’s driving it. Of four sites—AnnualCreditReport.com, Credit.com, FreeCreditScore.com, and CreditKarma.com—CreditKarma.com and FreeCreditScore.com are the only ones where you can get both the score and the corresponding report at the same time for free.
You are directed to each of the three credit bureaus to get your free credit reports. From each site, you must pay to get your credit score that corresponds with the credit report on that day. However, you get a small discount for going through AnnualCreditReport.com. See below.
You get your free credit score provided by Experian and then are directed to Experian.com to get your credit report. To purchase your corresponding credit score, you pay $1 for a 7-day trial and then $21.95 per month if you want your score monitored. You can cancel before the 7-day trial is over to avoid paying the monthly amount.
You get two free credit scores and credit reports provided by TransUnion and EquiFax.
You get a free credit score and credit report provided by Experian.
Your Experian credit report is free if you get to their site via AnnualCreditReport.com. To purchase your corresponding credit score, you pay $4.95 for the first month and $19.95 for each month after that if you want your score monitored.
If you go directly to Experian.com to purchase both your credit report and credit score together (not through AnnualCreditReport.com), you will pay $1 for a 7-day trial and then $21.95 per month if you want your score monitored. You can cancel before the 7-day trial is over to avoid paying the monthly amount.
Your TransUnion credit report is free if you get to their site via AnnualCreditReport.com. To purchase your corresponding credit score, you pay $1 for a 7-day trial and then $19.95 per month after that if you want your score monitored.
If you go directly to TransUnion.com to purchase both your credit report and credit score together (not through AnnualCreditReport.com), you will pay $9.95 per month.
Your EquiFax credit report is free if you get to their site via AnnualCreditReport.com. To purchase your corresponding credit score, you pay $1 for a 7-day trial and then $19.95 per month after that if you want your score monitored.