Credit card covered in paint

Understand what it means to have good credit or bad credit and the difference between a credit score and a credit report

A credit score is a number between 300 and 850, designed to predict the possibility that you’ll make payments on a loan or credit card balance. It’s “an indication of your trustworthiness as a number,” says Graham McCaulley, an assistant MU Extension professor with personal financial planning. A high score means you’ll be offered low interest rate options from credit card issuers, insurance companies, mortgage lenders and banks. This will save a considerable amount of money over time. A bad score, however, can make repayments expensive. A credit report shows your financial history and is the basis for a credit score. We’re breaking down some common myths about credit scores and reports.

Myth: Not having (or not using) a credit card will give you a good credit score.

Good credit takes effort and time to build, McCaulley says, but it doesn’t have to be complicated, and credit cards aren’t something to be afraid of. He suggests starting by opening a credit card for something with regularly scheduled charges, like Netflix, then putting the card away in a drawer. That way, the only charge going on the card is something minor you can afford each month. Another thing: By setting up automatic monthly debit payments that cover the full balance of the card, you’ll build your credit while barely lifting a finger.

Myth: Your income or the amount you owe determines your credit score.

Your score is based on your history with the money that you borrow. Even if you have a low income, consistently paying your bills and making sure not to borrow over your credit limit will yield a good score. MU junior Rachel Slings opened her credit card about two years ago to build up credit in anticipation of buying a new car. “I just treat it like it’s a debit card,” she says. “I’m not spending any money I don’t have.”

debt loan chart

Having good credit will help get you better interst rates on loans. Here's how much money it will take to pay off a $15,000 car loan over 5 years (60 months) with different credit scores.

Myth: You must pay to see your score.In the U.S., there are three major credit beaureaus that compete to calculate consumer credit scores: Experian, Equifax and TransUnion. Each allows you to get one free credit report per year. Liz Weston, author of How to Improve the 3-Digit Number That Shapes Your Financial Future recommends reviewing the reports carefully. Start by checking all identifying information. Look for names that aren’t yours, a Social Security number that doesn’t belong to you, incorrect birth date, addresses where you’ve never lived or accounts that might have been opened recently by someone other than you. Make sure to dispute errors.

Myth: It takes a long time to see improvement in your score.

Though it’s different for everyone, you can raise your credit score in a few months by making the right changes, says Andrew Zumwalt, an assistant MU Extension professor with financial planning. Pay your bills on time, keep track of how much you charge to your accounts, pay down your debt, and don’t close any current credit cards. It’s all about the ratio of what you owe versus your credit limit. Only using $200 when you have $1,000 available looks great to lenders.

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