Check your Credit Report & Credit Score

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Your credit score doesn't just dictate whether you can get a loan, it also impacts how good an interest rate you get.  The worse your credit score, the higher the rate of interest.  This bears repeating: Bad credit doesn't just mean you might not get the loan in the first place, it means that if you do get the loan, you'll have to pay more interest.  And seemingly small differences in rates actually have a big impact: the difference in 6% vs. 7% interest is pretty big.  Here are the three ways that higher interest rates hurt you.

1. You won't be able to afford as much home as you could with a lower interest rate.  For example, with a 6% rate you might be able to buy a $400,000 home, but with a 7% rate you might be limited to only homes that cost $360,000 or less.
2. Your monthly payment will be higher.  A 6% interest rate could get you payments of $3000 per month, while a 7% interest rate would bump you up to $3300 per month.
3. You'll pay much more interest over the life of the loan.  On a $500k loan, the difference between a 6% interest rate and a 7% rate means an extra $120k paid to the bank by the time you pay off the loan.

The bad news doesn't stop there.  Bad credit means that the bank might require a larger down payment than with better credit.

Here's an example about how credit scores might affect the interest rate—and therefore the cost of the loan—on a 30-year, $400,000, fixed-rate mortgage, with a $19,000 down payment.

So, improve your score as much as possible, with the tips we'll cover soon.

Average credit scores

The median U.S. score is 723. Here's how the American population's credit scores stack up.

Credit Score	Percentage of population with this score
800+	13%
750 - 799	27%
700 - 749	18%
650 - 699	15%
600 - 649	12%
550 - 599	8%
500 - 549	5%
less than 500	2%
From MyFico.com

Credit Report vs. Credit Score

Your credit report and your credit score are two different things.  Your credit report is a list of things like your credit card and bank accounts, outstanding loans, and your payment history.  Your credit score is a rating of how good your credit is, based on your report.  In other words, your credit report is a bunch of pages, and your credit score is a number, usually between 300 and 850.

The main things on your credit report that hurt your credit score are:

• Bankruptcy
• Outstanding (unpaid) debts
• Late payments
• High balances on your credit cards (>30% of available credit)
• Liens (both outstanding and paid)

You increase your credit score by cleaning up your credit report.  The score is based on the report, so get a clean report, and you'll have a good score.  We'll cover cleaning up your credit report later, but for now let's continue learning about your report and your score.

You actually have three credit reports

The companies that keep track of your credit report are called credit reporting agencies (CRA's) or credit bureaus.  There are three of them: TransUnion, Equifax, and Experian.  So you actually have three credit reports, since there are three CRA's that track your credit.  They're usually very similar (often nearly identical), but sometimes they can differ. For example, most creditors report late payments to all three CRA's, but some might report late payments to only one or two CRA's rather than all three.

This means that if you need to clean up your credit report, you may have to clean up three different credit reports.  Ask the bank where you're seeking your loan what CRA they use, and then work on cleaning up that report.  But if the bank pulls your reports from all three, then you need to clean up all of them.

You can get your own reports yourself because by law each CRA has to give you a copy of your report once a year if you ask for it.  (Thank you, Democrats.)  You start out at AnnualCreditReport.com which in turn sends you to each of the three CRA's websites.  But be careful!  These sites often make it hard to see how to get your report for free, while they try to trick you into paying for related services (e.g., free for the first 30 days after which they bill you every month).  Many people sign up for these accidentally, thinking that that's what they need to do in order to get their credit report from the site.  You really can get your reports from these sites for free, but you have to read carefully to do so.

Also beware that these sites will generally try to sell you non-FICO credit scores—that is, scores that are completely different from what your lender actually uses.  To protect yourself against that, let's learn more about credit scores.

Kinds of credit scores

The most common kind of credit score is the FICO score, which is calculated by a company called Fair Isaac.  Fair Isaac makes its money by selling the FICO scores on individual consumers to banks.  When your bank buys a credit report from a CRA like TransUnion, it usually also buys the FICO score calculated from the TransUnion report.  Since you have three different credit reports, you also have three different FICO scores.  In fact, your bank might order all three scores.

While the FICO score is the most common, the three CRA's each have their own scores that they try to sell to the banks.  TransUnion sells a "TransRisk" score and Experian sells a "ScoreX" score.  Banks generally use the FICO score because it's the industry standard, but some banks might go with the CRA brand because it's cheaper.  And some banks also use their own in-house system to calculate credit scores from credit reports, so they don't have to pay anyone for the credit score.

So there are potentially seven different scores your lender might see:

• The FICO score from the three CRA's
• The proprietary score from the three CRA's
• The lender's own internal score

So why is this important?  Because if you're checking your credit score(s), you need to make sure you're looking at the same one(s) your lender sees!  The best way to find out which score(s) your lender uses is to ask them—they'll generally tell you.  If you don't have a lender in mind yet, then get genuine FICO scores, because that's what most banks use.

Credit score scales

The FICO score used for mortgages ranges from 300-850.  But some scores range up to 900 (and as low as 250).  If you see one of these high-ranging scores, it's one one of two things.

1. It's a FICO score for credit cards or auto loans only (not for home loans), or
2. It's a CRA score, not a real FICO score.

So how do you compare the 250-900 scale to the regular 300-850 scale?  For the most part, you don't.  Different rating systems use different criteria.  You can have a great score with one system and a lousy one with another system.  Rather than trying to convert your non-FICO score to a FICO score, you should just get the proper standard FICO score in the first place.

Getting your credit scores

Getting them for free

In recent years, many credit cards have started offering free credit scores.  When you log in to your online account you can see your score, and some card issuers even put your score right on the printed statement they mail you.  Be careful of three things here:

1. What they're offering might be a CRA score, not a real FICO score.
2. Even if it's a FICO score, it might be the credit-card-only score with the scale that goes up to 900.  (See "Credit score scales", above.)
3. Even if it's a standard FICO score, it's based on only one CRA's report, and remember, you have three scores, and it's best to see all of them unless you know for sure that your lender is using only one particular score.

You can also ask your lender for your score(s) once they've run your credit.  Getting your credit scores after you've applied for a loan is kind of like putting on your seatbelt after you've already had a wreck, but if you've already applied for a loan, your lender will often tell you your score if you ask.  Most lenders make you pay for the report(s) before they order it, and if that's the case and they won't share it, point out that you paid for it, not them.

Of course, if the lender already approved your loan and you got a great interest rate, then your credit score is kind of a moot point.

Paying for them

• You can get your TransUnion- and Equifax-based FICO scores from MyFico.com for $20 each, or $30 for all three.  That's the monthly cost, so once you get your scores, cancel the service to stop the rebills.
• Beware of other sites offering "Your Credit Score", since 99.9% of the time they're not real FICO scores.
  
  

Do I need to improve my credit score?

That depends on how good your credit is, of course.

Excellent credit. If you know that each of your FICO credit scores is around 760 or higher, your credit is excellent and there's no need to try to improve your score.

Good credit. If your FICO scores are between 700 and 759, then you have a choice: cleaning up your reports and getting your scores about 760 will get you a slightly lower interest rate, but not much.  (See the table above.)  So it's up to you whether it's worth your time in trying to improve your credit rating.

Fair to Bad credit. If your FICO scores are less than 700, or if you don't know your scores but you have your credit reports and can see that they list negative items, then it's time to start rebuilding your credit. That's our next item.

Where to now?

• If you know your credit is bad, proceed to repairing your credit.
• If you don't have any credit, then see how to establish credit.
• If you know your credit is good, then proceed to find a lender.

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