Your Credit Score 101
Schooled: Your Credit Score

Your credit score is a three-digit number that tells lenders how responsible you are with your loans and credit cards—and it affects whether you’ll be approved for credit, as well as the interest rate you’ll pay.

Myths Debunked

By Ruth Susswein, deputy director of National Priorities with Consumer Action, a national nonprofit consumer-rights organization, separates credit score myths from facts. 

 

MYTH: My credit score is based on my income.

TRUTH: Income, age, and race typically aren’t part of your credit score. Credit bureaus create your score by measuring five areas (see chart above). The score usually falls along a scale from 300 to 850. A score of more than 700 is a sign of good credit management.

 

MYTH: My credit report and my credit score are the same thing.

TRUTH: Your credit report lists all your loans and credit cards—open and closed—and your payment record for each. Your credit score is a number based, in part, on information from that list.

 

MYTH: My credit score always stays the same.

TRUTH: “Your credit score is a snapshot of one moment in time,” Ruth says. As you open new credit cards, make payments, or rack up purchases, you can gradually raise or lower your score.

 

MYTH: A few late credit card payments won’t hurt my credit score.

TRUTH: “Late payments hurt your score the most,” Ruth says. “Recent late payments do more damage.” The good news: You can turn things around. “The more on-time payments you have, and the older the late payment is, the better you look to a lender.” 

What About Credit Counselors?

When should I call a Credit Counselor?

It can be hard to ask for help with your finances, but if you're having trouble making ends meet or debt collectors are calling, now might be the right time. Gail Cunningham of the National Foundation for Credit Counseling (NFCC) answers four common questions about how credit counselors can help you.   

 

What is a credit counselor?

“A certified credit counselor with an NFCC member agency can identify the leaks in your budget and help you design a repayment plan that’s right for your situation,” Gail explains. Certified counselors belong to a national organization, like the NFCC, with higher standards for services.

 

How does counseling work?

At your first session, you’ll review your living expenses, loans, and credit-card balances. The counselor then helps you prioritize what amount to pay toward each account monthly. You also can set up a debt management program (DMP). “For a DMP, you send in a set amount of money each month to the agency,” Gail says. “The agency then pays your creditors for you.”

 

How much does credit counseling cost?

“Our member agencies provide counseling either for free or low cost,” Gail says. “If there’s a fee, it’s usually around $20.” For a DMP, consumers usually pay a one-time setup fee of roughly $30, plus a monthly maintenance fee averaging $20 to $30. 

 

What are the advantages?

In the short term, if you set up a DMP, counselors can often negotiate a lower monthly payment, a lower interest rate, or stop late-fee charges. “That frees up more money to pay off your obligations,” Gail says. Over the long term, your finances and your credit rating can both improve.

 

Note: This information is not a substitute for professional financial, legal, accounting, or tax advice. If you have additional questions, please contact a financial or tax professional.

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