Many people don’t know their credit scores and whether they have good or bad credit, let alone know about credit scoring systems. When applying for a credit card or an auto loan, these things come up, and you might get confused and wonder why credit bureaus have to check your accounts and credit history.
Understanding the importance of your credit score
Your credit score is usually represented by a three-digit number that ranges from 300 to 850. The two main scoring systems are FICO and The VantageScore model. Both use the same score range but with slightly different factors in calculations. These metrics are used by lenders to determine if you are eligible for a new credit card or loan. Higher scores qualify for better contract terms with lower interest rates.
It often isn’t a priority to thoroughly understand your credit score, especially if you don’t have plans to apply for a loan. However, at some point in your life, you may want to buy a vehicle or your own house. To make these purchases, you may need a car loan or a home loan. And only then will you realize that loaners like banks, credit unions, and financial institutions don’t just look at your net worth and savings accounts. They check your credit history, and that includes your credit score. Beyond your ability to save money and personal banking activities, they are more concerned about your credit card debt and reliability to pay off a personal loan, including student loans.
How can credit scores affect your financial situation?
For example, let’s assume that you want to borrow $200,000 for real estate that comes with a thirty-year contract with fixed mortgage rates. Ultimately, the terms and conditions will vary depending on your reports and scores. As of March 2020, those with higher FICO scores (760–850) can expect an interest rate of 3.408%, which would result in a monthly payment of $870 and the total interest amounting to $113,191. When compared to lower scoring ranges (620–639), rates can go up to 4.85 %. In this case, your monthly payment would be $1,055 and a total of $179,938 interest paid. In other words, unless you improve your credit score, you may end up paying a lot more than you should. Here are some more examples:
Identity theft and identity protection
Consumers reported $905 million in total fraud losses in 2017 while that number went up in 2018 for a total of $1.48 billion. Theft victims don’t only need to worry about the security of their funds, but also about their credit reports and scores. Someone that has claimed ownership of your identity can open new credit card accounts under your name, which can end up affecting your credit score. ID theft has become a global problem. Fortunately, it can be prevented with credit monitoring. It helps users keep track of their financial accounts and credit history.
Credit score changes over time that wasn’t caused directly by an action you took, can be used to pinpoint potential incidents of fraud. It’s important to maintain situational awareness of your credit scores and credit history. If you use protection services like Consumer Affinity’s Split® Credit Monitoring service, you can expect email notifications every time a new account is opened under your name, your score changes, or a balance change is recorded in one of your existing accounts. Split® provides full identity theft protection along with identity theft insurance with an aggregate limit of liability up to $1M. This includes full victim assistance for those who have become identity theft victims.
How to react to identity theft
If cybercriminals can open accounts under your name, that means they have your complete identity info, including your social security number. If this nightmare ever becomes a reality, there are some actions that you should take immediately.
- Gain access to an updated version of your credit report. Note all accounts that have been made by the fraudsters.
- Call for a security freeze by contacting the fraud department of the bank in question. A timely response can prevent more damage.
- Change all passwords and PINs on your existing accounts.
- Consider a credit freeze via a fraud alert. Note that a fraud alert puts a flag on your report for at least 90 days. You will be provided with a PIN code that you can use to turn off the freeze when you need to apply for new credit.
- Report your case to FTC online. This action creates an Identity Theft Affidavit, which is a document that can help victims prove to a business that their personal financial data has been used to open a fraudulent account. An Identity Theft Affidavit includes your personal and account information.
- File a report with your local police department. A combination of a police report and Identity Theft Affidavit provides a number of rights and protections for victims. You can’t dispute inaccurate information unless you have proof of fraudulent activity under your name.
- If you see something odd on your credit report, dispute it!
Don’t forget to take the opportunity to leverage identity theft insurance and/or restoration services if you subscribe to these services. They can help reduce the stress that’s typically associated with identity theft. If you have any questions, please contact us at +1 (833) 331-HERO (4376) or at firstname.lastname@example.org.
Keeping a good score puts money in your pockets
As we have seen so far, many factors affect your credit score, and we advise that you understand how the whole process works. There are five main factors with a different percentage of impact:
- Payment history – 35%
- How much you owe – 30%
- Length of credit history – 15%
- Type of credit (credit mix) – 10%
- New credit (inquiries) – 10%
Depending on how well you handle your monthly payments, your score may increase or decrease. Those who struggle to make their payments on time end up with lower scores and can expect higher interest rates from lenders.
On the other hand, if you want to improve your credit scores, you should pay close attention to the factors above. If you have a history of paying your bills on time, this sends a clear signal to lenders that you are responsible with your finances. Your credit utilization should also be taken seriously because using a lot of your available credit hurts your overall score. If you want to stay in the top-scoring ranges, you should also avoid opening a lot of new accounts in a short time period.
Those who have a good understanding of the credit system can manage their finances responsibly and save a lot of money in the long run. As the calculations above show, better credit scores offer better interest rates. Lenders need to make sure that you are able to pay them back, so extra security on their end is always to be expected.
With Consumer Affinity’s Credit Monitoring, you don’t only keep track of your FICO scores but also protect yourself from the rising threat of identity theft, scams, and fraud. Keeping your personal information in check eliminates the possibility of fraud and lost funds. As it turns out, the credit system doesn’t only track your financial situation but can also serve as an extra layer of protection against ID theft. You can also use our Community platform, Split® to learn about threats to your online safety and security.