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Why It Pays to Know the Score

By Vanessa McGrady

(PHOTO: Vasily Pindyurin/fStop/Offset)

Nobody likes to be judged. But, high or low, a credit score can definitely feel like a judgment of your financial habits.  

So what’s in a number? Plenty.

Here are four reasons why you want to keep your credit score healthy and check it regularly:

Fix errors. If you notice a sharp decline in your score but can’t think of a reason for it, there may be an error on your credit report. That issue will follow you around until you address it—and might affect lenders’ decisions. In fact, that’s one of the main reasons to check your credit reports regularly—at least once a year, recommends the Consumer Financial Protection Bureau.

Lower interest rates. When you see that your score’s gone up, it might be the time to pounce on a new credit card, loan, mortgage or refinance opportunity. Good prospects with solid credit scores may get better interest rates. For example, someone with a higher credit score paying 3% on a $200,000 mortgage over 30 years would be paying a total of $303,555. Someone with a lower credit score who pays just half a percentage more would end up paying nearly $20,000 more for his or her loan.

Better car insurance rates. In every state except California, Hawaii and Massachusetts, car insurance companies can look at your credit history and predict how likely you are to file a claim, says Consumer Reports.  “Our single drivers who had merely good scores paid $68 to $526 more per year, on average, than similar drivers with the best scores, depending on the state they called home,” Consumer Reports said in a special report on car insurance rates. Note that insurance companies use credit-based insurance scores (rather than FICO® Scores) for insurance underwriting.

Plan a move. Landlords can see your credit score. As your credit improves, so may your ability of scoring that dreamy place in your favorite neighborhood.

Do you know the score? Find out for sure with Discover’s new Credit Scorecard, where you can see your FICO® Score, a score that 90% of top lenders use, for free even if you’re not a customer. *See Credit Scorecard info.

FICO is a registered trademark of the Fair Isaac Corporation in the United States and other countries. Discover Financial Services and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Discover Financial Services and Fair Isaac do not provide “credit repair” services or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating. Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.

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Taking the Long View on Credit Health

By Laura Lambert

(PHOTO: Roberto Westbrook/Image Source/Offset)

You don’t make a credit score overnight. A good, very good or exceptional score is built steadily over time. That’s because your credit score is derived from the data in your credit reports—whether each payment is on time, late or delinquent. And it takes time to accumulate a record of payment history. The month-to-month and year-to-year patterns mean a lot.

Here’s how time can play a role with your credit score.

~30 days

That’s how long the credit bureaus have to review and respond to your requests to fix errors in your credit report—which may be negatively affecting your score. There’s a lot of data in any given credit report—and mistakes do happen. (According to a Federal Trade Commission study, 1 in 4 consumers have errors significant enough to affect their score.) If you can fix an error, you can often improve your score.

~12 months

By law, you can get free copies of your credit reports from each of the three credit reporting agencies—Equifax, Experian, TransUnion—once every 12 months. Think of it as your annual financial checkup—and an opportunity to address any errors that might be negatively affecting your score.

~9 months to 3 years or more

Perhaps surprisingly, the higher your credit score, the longer it often takes to bounce back to that same value after a negative mark.

According to one piece of FICO research, it can takes ~9 months for someone with a FICO® Score of 680—slightly less than the average FICO® Score—to bounce back to a 680 after a recent 30-day missed mortgage payment. But it takes approximately three years for someone with a 780, or a very high FICO® Score, to do the same. The data in this study shows that lower scores already reflect some degree of risk, so the impact of a new delinquency being posted is not as dramatic as is seen when a new delinquency is posted on a credit report with no previous late payments being reported.

7 years

They say time heals all wounds—including, it seems, most bad marks in your credit history. Specifically, it takes seven years for most negative data to be removed from your report. If you hit a rough patch, missed a few payments, foreclosed or worse, you can make it up with several years of good, consistent, credit-boosting behavior. (Note: It takes 10 years for Chapter 7 bankruptcies to be deleted from your report)

The longer the better

When it comes to credit scores, having a lengthy line of credit or loan with some years behind it is a good thing, so long as you’ve paid your debts consistently. It’s exactly the kind of track record lenders are looking for. While there’s no set age of credit history that will magically boost your score, length of credit history does typically comprise 15% of your score.

Check your credit score with Discover’s new Credit Scorecard—where you can get your FICO® Score, a score that 90% of top lenders use, for free, even if you’re not a customer. *See Credit Scorecard info.

FICO is a registered trademark of the Fair Isaac Corporation in the United States and other countries. Discover Financial Services and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Discover Financial Services and Fair Isaac do not provide “credit repair” services or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating. Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not int

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Defining Terms: Credit Report vs. Credit Score vs. Credit Profile

By Vanessa McGrady

Short of tossing a buck into a street musician’s hat, nearly every financial transaction you make contributes a piece to your overall money story. This story is told to lenders, banks, credit card companies, employers, landlords and others, and it’s critical in helping to determine your approvals and interest rates. There are three main components to your story—your credit report, your credit score, and your credit profile—and even though they sound similar, they’re not.

(PHOTO: mimagephotography/Shutterstock)

Credit report The three major credit reporting agencies—Equifax, Experian and TransUnion—compile a detailed data credit report that includes:

Your accounts, such as student loans, mortgages, bank loans, car loans and credit cards

Your repayment history, noting if you were usually on time or if there were any delinquencies

How much credit is available to you

Any debt information, such as medical debt owed

Public financial information such as bankruptcies, a lien on an asset, or a court judgment against you.

Lenders, cable companies and sometimes even employers look at credit reports to help understand how you manage your available credit.

Credit score A credit score is a single three-digit number used to quickly assess your creditworthiness. Ninety percent of top lenders use a FICO® Score. In fact, there are various FICO® Scores, fine-tuned for specific categories, like auto loans or credit cards.

Credit scores are based on information in your credit reports. They can vary due to differences in how and when lenders and credit holders report your information to the credit reporting agencies.

Your credit score is one of several factors used by lenders to determine if you’re a good candidate for a loan, mortgage or credit card. FICO® Scores range from 300 (very poor) to 850 (perfect). The average FICO® Score is 699.

Credit profile A credit profile is a tool that provides an easily understandable interpretation of your credit report and credit score. Different companies offer credit profiles under various names, such as Discover’s Credit Scorecard, which offers a credit profile in addition to a FICO® Score. A credit profile helps you to identify what you’re doing right, such as paying credit cards on time, and what could be a red flag to a lender, like an account that’s gone into collection.

Make sure your story is being told correctly. With Discover’s new Credit Scorecard, get your FICO® Score, a score that 90% of top lenders use, for free, even if you’re not a customer. *See Credit Scorecard info.

FICO is a registered trademark of the Fair Isaac Corporation in the United States and other countries. Discover Financial Services and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Discover Financial Services and Fair Isaac do not provide “credit repair” services or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating. Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.

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Why Your FICO® Score Matters

By Dara Pettinelli

(PHOTO: Image Source Trading Ltd/Shutterstock)

A good credit score is key, right? But there isn’t just one score to consider. Here are some things to know about FICO® Scores.

FICO

In the late 1980s, the Fair, Isaac Corporation developed an objective method for assessing a person’s credit risk—now known as FICO® Scores.  And today, FICO® Scores are being used by 90 percent of top lenders.

FICO® Scores are three-digit numbers, ranging from 300 to 850. You likely have multiple FICO® Scores for several reasons.  First, FICO® Scores have been around for more than 25 years.  FICO periodically updates the algorithm and releases the updated version to the market. From there, each lender determines if and when it will upgrade to the latest version. Some lenders make the upgrade quickly, while others may continue to use the older versions.

In addition, industry-specific FICO® Scores are versions that are optimized for a certain type of credit product, such as auto loans or credit cards. The foundation of these versions is the same as the base FICO® Score versions, but they are fine-tuned based on industry-specific risk behavior.  Many lenders use these industry specific versions.

Furthermore, you have FICO® Scores based on data from each of the three credit bureaus: Equifax, Experian and TransUnion. Each score is based on the specific information the credit bureau keeps on file about you.

Important factors include:  

How much money you owe different lenders

Your history of paying bills on time

How long you've had credit accounts  

The types of credit you have (i.e.: mortgage loan, credit cards)

The number of recent new credit applications

Other Scores

In addition to the several dozen possible FICO® Scores, there are other credit scores and many lenders also leverage custom credit scores.

If all this scoring makes your head spin, just remember that, generally, people who pay their bills on time and keep their debts low look less risky to lenders and have the ability to rent or buy nice things—and they may also enjoy lower interest rates on credit cards and loans. Experts also recommend simply keeping credit utilization, or the amount owed, as low as possible to keep out of financial hot water.

Stay on top of your FICO® Score with Discover’s new Credit Scorecard, which gives you your FICO® Score for free, even if you’re not a customer. *See Credit Scorecard info.

FICO is a registered trademark of the Fair Isaac Corporation in the United States and other countries. Discover Financial Services and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Discover Financial Services and Fair Isaac do not provide “credit repair” services or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating. Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.

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Which Type of Credit Card Is Right for You?

By Ester Bloom

(PHOTO: Maskot/Offset)

Your needs are different at various stages of your life, and the credit cards that will best meet those needs are different too. Here’s a run-down of which credit cards you may be interested in depending on your situation and your priorities.

College Kid: Lots of people at college find themselves caught in a Catch 22: they need a credit card to start establishing their credit, and yet they can’t get a credit card until they have established their credit. The student credit card may be an option. It’s nothing too flashy, and it doesn’t usually come with many, if any, rewards – though some do reward, say, good grades. Regularly paying off small balances on this card is a way to demonstrate that you are the trustworthy adult your parents hoped you’d become.  

20-something: If you’re just getting started as a self-sustaining adult, you may be tempted by a card that offers a credit limit in the thousands of dollars, or by one that dangles the prospect of exciting rewards. The smartest thing you can do, though, is to take it slow. Get a low-interest credit card and put in the work of paying off your balances in full every month. Focus on finding a card with as few fees as possible and flexible payment terms.

Savvy Shopper: If you reach for your credit card to pay for everything from your morning coffee to your evening cocktail, and you’re just as regular about paying off your balance every month, a rewards card that offers cash back—for example, 1% on each purchase, but also up to 5% on special categories—may be right for you. The more you spend, the more you’ll make. Take a minute to ensure that the card you want doesn’t come with an annual fee.

Prodigal Son: You’ve had some trouble in the past but you have seen the error of your ways and you’re ready to demonstrate how responsible you can now be with money. If you’re looking to reestablish yourself, a secured credit card, which requires some collateral and offers lower credit lines, can be a great way to start. Some secured cards come with rewards like cash back.

The World Traveler: If your most valued possessions are your memories of trips to far-flung locales like Fiji and Lima, consider a rewards card that offers travel rewards like miles. Some of these cards are airline specific; others are more general and help you earn points that you can redeem for deals on car rentals, hotel stays, admission to theme parks, and other amenities. Be sure to look for one without an annual fee. Depending on how much you actually manage to get away to use your points, that fee might seriously eat into your profits, so before you proceed, have your vacation days requested and passport ready.

When you’re looking for the just-right credit card, your credit score matters. Check out Discover’s new Credit Scorecard, which gives you your FICO® Score, a score that 90% of top lenders use, for free, even if you’re not a customer. *See Credit Scorecard info.

FICO is a registered trademark of the Fair Isaac Corporation in the United States and other countries. Discover Financial Services and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Discover Financial Services and Fair Isaac do not provide “credit repair” services or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating. Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.

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The Difference Between Good and Bad Credit

By Ester Bloom

(PHOTO: Ranier Berg/Westend61/Offset)

When we assess potential friends, partners, bosses and employees, we take lots of factors into account, including our gut feeling about whether we can trust them. Banks have to be more efficient and fair, so they use credit scores—where we fall on a scale of creditworthiness—as one of the indicators of credit health. The real world implications of this can be life changing.

Here are some of the many times in your life that your credit score will matter.

When you’re trying to open up a credit card. If you have what financial institutions consider to be an “exceptional” credit score of 800+, banks may compete to get your business. That means that you could get a credit card with a great introductory interest rate, plenty of perks and rewards, and a credit limit in the thousands of dollars.

When you’re trying to rent an apartment. From San Francisco to New York, these days cities have such tight rental markets that simply finding a place in your price range where the toilet isn’t in the kitchen is hard enough, but trying to get the landlord to rent you a place if your credit rate is only a 640 is even tougher. You may be asked to put forward someone as a guarantor who can co-sign your paperwork for you and accept responsibility to pay on your behalf if you can’t. You may have to pay a company to act as your guarantor. Or you may lose out on apartment after apartment to candidates who seem more attractive because they have higher credit scores.

Better car insurance rates. In every state except California, Hawaii and Massachusetts, car insurance companies can look at your credit-based insurance score and predict how likely you are to file a claim, says Consumer Reports.  If your score takes a sudden dive, your rates might mysteriously go up.  Conversely, when your score goes up, perhaps that’s the time to see if you can get a better deal.

When you’re trying to buy a car. A “good” credit score of 720 will help you whether you’re on the lot looking at new SUVs or shopping online for a pre-owned hybrid. You may not have to pursue a loan through an alternative company or get stuck paying higher rates.

Is your credit good, bad or in-between? Find out with Discover’s new Credit Scorecard—where you can get your FICO® Score, a score that 90% of top lenders use, for free, even if you’re not a customer. *See Credit Scorecard info.

FICO is a registered trademark of the Fair Isaac Corporation in the United States and other countries. Discover Financial Services and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Discover Financial Services and Fair Isaac do not provide “credit repair” services or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating. Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.

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5 Habits of People with Excellent Credit

By Allison Stadd

Habits like regular exercise, eating a balanced diet and getting enough sleep can keep you healthy. But what can you do to keep your credit score healthy, too?

A lot, in fact. And a healthy credit score pays dividends.

(PHOTO: Mejini Neskah/Shutterstock)

With healthy credit, you could receive lower interest rates on credit cards and loans, swifter approval when you want to refi, better card benefits, stronger bargaining power with lenders and even cheaper cell phone plans.

How do you do it? Below, five habits of people with excellent credit:

They pay bills on time, all the time. About 35% of your FICO® Credit Score is determined by your payment history. If you miss payments, it could result in a black mark on your credit report for up to seven years, although the impact diminishes as time goes on. Sign up for automatic online payments whenever possible, and set alerts on your calendar for any other bills.

They don’t close any credit cards. Whether or not you use all your credit cards, once you’ve opened them, it’s best to leave them be. When you close even one card, you can negatively impact your revolving credit utilization, the ratio of how much you owe compared to your total credit limit.

They think twice about applying for new credit. Every time you apply for new credit, it often results in what’s called a “hard inquiry,” which could lower your credit score by a few points (typically, 10% of your FICO® Credit Score is based on new credit opened, which includes inquiries and other data about new accounts). If you need new credit, be sure to pick the right card for you.

They under-use their cards. Just because you have a $10,000 (or $5,000 or $1,000) credit card limit doesn’t mean you should charge that much each month. Think about that credit utilization ratio: you want to spend as little as realistically possible percentage-wise of the amount of credit available to you.

They fact-check their credit reports and dispute any errors. Per the federal government, you’re entitled to a free copy of each of your three major credit reports once every 12 months. If anything on the report is incorrect or incomplete (such as account balances or missed payments), dispute it with the credit bureau that supplied the report.  

Maintaining a great credit score is just like other healthy habits—it’s something you build up over time. And the better off you are financially, the more resources you’ll have to devote to the other areas of your life. Give credit to your credit!

It’s easy to know the score—your credit score—with Discover’s new Credit Scorecard. Get your FICO® Score, a score that 90% of top lenders use, for free, even if you’re not a customer. *See Credit Scorecard info.

FICO is a registered trademark of the Fair Isaac Corporation in the United States and other countries. Discover Financial Services and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Discover Financial Services and Fair Isaac do not provide “credit repair” services or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating. Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.

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3 Mistakes You’re Making with Your Credit Right Now

(PHOTO: The Good Brigade/Offset) By Allison Stadd

When’s the last time you thought about your credit score? If it’s been a while since credit’s been on your brain, you’re not alone—nearly 60 percent of Americans don’t know their score.

That lack of familiarity is a mistake. Even if you’re pretty good with money, you could still be working against your credit score. For starters, not educating yourself on where you stand means you’re not as fully informed about your financial picture as lenders are. Free resources like Discover’s Credit Scorecard let you check your FICO® Score at no charge, and even see key factors that are affecting your score, from number of recent credit inquiries and length of credit to missed payments.

Arming yourself with knowledge of your personal credit is the first step in correcting the course of your credit. Below, three additional common ways your current behavior might be inadvertently harming your credit score:

Closing old credit accounts: It may seem counterintuitive, but closing an old credit card you don’t use anymore could negatively impact your credit score in the short term. That’s because you should keep your revolving credit utilization (the ratio of how much you owe to your total credit limit) low. When you close a credit card—no matter the card’s limit—you’re making the denominator in that ratio smaller, which drives utilization up. If you don’t want to keep paying an annual fee for a card you don’t use anymore, call the company to see if they’ll let you migrate to a card with no annual fee.

Making just one late payment: If you regularly pay at least the minimum of your credit card balance on time each month, you may feel like the pressure’s off and you can get away with just one measly missed payment. Whether it’s because money’s tight or it slipped your mind, it may hurt your score—no matter how good your history’s been. Mistakes may result in a black marks on your report for up to seven years, although the impact of a late payment diminishes over that seven-year period. Note that most lenders won’t report a missed payment for up to 30 days after it was due. But don’t count on that leeway as a safety net.

Consider whether to get a credit limit increase, but only if you have the financial capacity to manage it:  Financial advisors recommend only applying for and using credit or credit line increases for the amount of credit that is needed. That said, if you determine an increase is necessary and can be managed, you may be able to apply online or by phone. You’ll have to supply answers to a few questions, such as your income, employment status and the amount of your rent or mortgage. Why go to the trouble? That credit utilization ratio again. The more credit available to you, and the smaller percentage of it you use, the better off your credit score may be.  Note that some banks make what’s called a “hard pull” on your credit—meaning the credit check to determine whether you get the increase may temporarily ding your credit score. (The credit check also becomes part of your credit report.) You can always discuss this with the card representative—and then, if there is a hard pull, decide whether you want to proceed. If you’re in good standing with your credit, and the increase is granted, the risk of a hard pull may very well be worth it.

The best defense, as they say, is a good offense. In the case of your credit, that means equipping yourself with full knowledge of your credit history and credit score. It also means thinking twice before making any moves like the above.

Are you making credit mistakes? Find out with Discover’s new Credit Scorecard—where you can get your FICO® Score, a score that 90% of top lenders use, for free, even if you’re not a customer. *See Credit Scorecard info.

FICO is a registered trademark of the Fair Isaac Corporation in the United States and other countries. Discover Financial Services and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Discover Financial Services and Fair Isaac do not provide “credit repair” services or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating. Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.

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How to Interpret Your FICO Score

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The Dynamics of FICO Credit Scores