Most people know what credit reports and scores are, at least generally. Awareness even figures to be on the rise as consumers rebuild financially from the wreckage of the Great Recession, armed with a cavalcade of new products and services – including a host of free credit score offerings – designed to help empower the individual and prevent recessive recidivism.
Much remains to be learned, however, judging from the fact that most people still have no idea what their number is. And what you don’t know is probably costing you, considering that credit scores affect seemingly everything – from borrowing costs and capabilities to housing and employment options. So, why don’t we try to clear up some of the mystery surrounding this numerical shorthand for financial responsibility, and perhaps open the door to some significant savings in the process?
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To that end, here are some of the most eye-opening, wallet-stuffing things you need to know:
1. We All Have More Than One (Thousand) Different Credit Scores
The term “credit score” is something of a misnomer, as its singularity can be interpreted to mean that each of us has but one score that alone controls our financial life. Such an inference is supported by the fact that one credit scoring company, the Fair Isaac Corporation, has long been the most popular partner for lenders.
But it’s not true.
There are more than 1,000 types of credit scores currently in use, according to Experian, and each is based on a slightly different recipe. That’s one reason why free credit scores from two different providers may differ. What’s more, lenders won’t tell you which scoring model they base approval decisions on, despite usually applying proprietary modifications anyway. That’s why knowing your exact score according to a particular model won’t provide perfect foresight as to the terms you will be offered on a loan or credit card, or even if you’ll be approved in the first place.
2. Credit Scores Are Only As Good As The Data They’re Based On
As much as it may seem like credit scores are pulled out of thin air, they all share a common origin: our credit reports. While somewhat reassuring given that we all have access to this information through the government’s free annual credit report program, it’s also worrisome considering how easily inaccurate or fraudulent information can impact our scores and, thus, our finances.
A congressionally mandated series of studies by the Federal Trade Commission indicates that 20 percent of consumers have an error on at least one of their major credit reports and 5 percent have an inaccuracy significant enough to result in inflated loan or insurance costs. Regularly reviewing your credit reports is therefore an essential component of credit score maximization.
3. You’ll Pay More For Car Insurance If You Have No Credit
Credit scores not only impact the cost of car insurance, but they do so in an inconsistent and confusing fashion. While the average person with no credit pays about 49 percent higher premiums than his excellent credit counterpart, according to a WalletHub study, the correlation differs across states and insurance providers. For example, there is a 62 percent fluctuation between premiums paid by customers of Farmers Insurance, whereas GEICO’s premiums sport only a 32 percent difference. And premiums differ by up to 115 percent for Michigan drivers due to credit scores, as opposed to only 15 percent for people in Connecticut.
4. Credit Scores Are Like Snail Mail For Fraud Alerts
While President Barack Obama has referred to the availability of free credit scores as “another weapon against identity theft,” that’s not quite true. It usually takes weeks, if not months, for the effects of a fraudulently opened or accessed financial account to be incorporated into a credit score. And even then, the evidence will be so thoroughly diluted that noticing the change, let alone accurately identifying the cause, is unlikely. Meanwhile, the damage will compound and reversing it will become more complicated.
You're far better off starting at the source, your major credit reports, which have been free for more than a decade.
5. Bad Credit Isn’t Sexy
In this era of big data-dating and financially-induced stress, it’s interesting to note how one’s credit standing impacts their prospects for love. Roughly 30 percent of women and 20 percent of men say they wouldn’t marry someone with bad credit. And while you might have been able to keep this type of information under wraps in the “olden days,” people now seem to be moving-in together and co-mingling their finances earlier in the course of a relationship. Growing credit awareness also means the dating pool will be increasingly cognizant of the signs of bad credit as time goes by.
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