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More Than Your Score: Credit Basics You Need to Know


By Amrita Jayakumar, NerdWallet

Getting your credit score today is easy — just turn to your bank, credit card issuer or one of the many apps and websites out there.

That means millennials, unlike their parents, have the advantage of early insight into their financial profiles. But looking isn’t enough. Without knowing the basics of credit, looking at your data is like having the pieces to a puzzle, but not understanding how they fit together.

Here’s what to know.


You have many scores

You have multiple credit scores, not just one. Those scores vary, depending on:

  • What scoring model was used. You’ve probably heard of FICO, the one most widely used by lenders. VantageScore is its fast-growing competitor.
  • Which version of FICO or VantageScore was used. They each have a few — some older, some newer, some specific to financial products like credit cards or auto loans.
  • Which of your credit reports provided data to create the score. Three major credit bureaus — Experian, Equifax and TransUnion — each maintain a record of your credit use. Those reports can be slightly different, depending on whether your creditors report activity to one, two or all three.

Lenders may pull different versions of your scores than you see, and you cannot always know which one they use for approval decisions, says Katherine Lucas McKay, program manager in the financial security program at the Aspen Institute, a Washington, D.C.-based think tank.


Don’t panic about your score

You cannot control what score lenders use, but you can control how you manage credit. Fortunately, a small set of good credit habits have the power to benefit all of your scores.

Paying your bills on time and using less than 30% of your available credit limits (the lower the better) will help build a strong score, regardless of the scoring model. That’s because FICO and VantageScore both emphasize having a good payment history and low credit usage when calculating scores.

To accurately track how your credit is doing, make sure you’re looking at the same score (FICO or VantageScore) generated using data from the same credit report.


Forget the myths

When it comes to credit, common misconceptions get in the way of building good habits.

One persistent myth: Checking your own score hurts it.

“You’re not going to lose points for looking at your credit,” says Angela Moore, a certified financial planner at Modern Money Advisor in Miami. Checking your own score triggers a “soft” pull on your credit but doesn’t affect your score.

A “hard” pull, on the other hand, occurs when you apply for a loan or a landlord asks to scrutinize your credit, for example. Hard pulls also go on your credit reports and can temporarily knock a few points off your score.

Moore says another misconception is that utility and cell phone payments help credit. Managing those bills responsibly is necessary, she says, but they don’t affect your score — unless you forget to pay.

Say you move out of a shared apartment and leave the power bill in your name. If your former roommates don’t make payments, the account could end up in collections and damage your credit.

To prevent such surprises, use free services to scan your reports for accounts you don’t recognize or forgot were open, Moore says. Also check your detailed credit reports from annualcreditreport.com; you’re entitled to one free annual report from each bureau.


Don’t get credit just to have it

“Credit should be used cautiously and strategically when needed and not because you feel forced,” Moore says. Don’t take on more debt than you can handle just to build a score.

Scoring models consider the mix and number of accounts you have, but that matters much less than paying on time and keeping credit usage low. Making student or auto loan payments is enough to maintain a decent score, Moore says.

Credit cards are convenient, and many offer rewards, but if you cannot pay off monthly balances, you might pile up debt. A TD Bank survey released in March found that nearly a third of millennials surveyed didn’t pay their cards off in full each month. They may be falling for another credit myth, that keeping a balance is good for your score. It isn’t.

If an issuer offers you an increase, think carefully before accepting, says Lucas McKay.

“If you use it just to increase your available credit but keep your spending the same, that’s great. But if not, then think about how much more you are likely to spend with that increase.”

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