You may be able to text with 1 hand, name all your memes and replicate cupcake recipes off of Pinterest, but there’s 1 area you’ve yet to master: credit scoring.
According to a recent survey by the Consumer Federation of America and VantageScore Solutions, 18- to 34-year-olds know less than other demographic groups about who collects the information on which scores are based, and what defines a good credit score.
Don’t feel too bad. There’s an explanation for this.
“Millennials are less knowledgeable about credit scores simply because they have had less experience in the financial services marketplace” than older consumers, says Stephen Brobeck, executive director of the Consumer Federation of America.
All this credit confusion could lead to big problems down the road. You need a solid credit score to qualify for a mortgage, auto loan and other financing. One misstep — like forgetting to pay that credit card bill you opened up just to score a discount on some sweet new kicks — can make the good old American dream that much harder to achieve.
In order to help you avoid any pitfalls, we’ve put together a primer on credit scores and credit reports. Here’s what you absolutely must know.
Who’s in charge of compiling your credit report? Nope, it’s not that company FICO. Or your bank. Or even the NSA. (We hope.) Instead, the 3 major credit bureaus — Experian, Equifax and TransUnion — are responsible for pulling together your credit records.
Here’s how the cycle works: Banks and financial institutions send these bureaus data about their current customers.
“Any type of credit contract you have related to debt will be reported,” says Rod Griffin, director of public education for Experian, including account information on credit cards, mortgage loans, car loans and other lines of credit. Debt collectors report to the credit bureaus, too. So, yes, that unpaid college health center bill could pop up on your report and hurt your credit score.
Experian, Equifax and TransUnion also collect information via public records on bankruptcies, court judgments and tax liens. And lenders will let the “Big Three” know when you come in and apply for a loan. (This shows up on your report as what’s known as a “credit inquiry.”)
In turn, the bureaus provide an up-to-date version of your credit report to these lenders when you, for example, try to score some financing for your very first car. Why?
They’re using the information to “determine the likelihood that you will pay them back as agreed,” Griffin says. Credit scores and credit reports also help to determine what the loan’s interest rate will be.
The better your score, the lower the interest rate … which is one of the reasons credit scores can make or break your budget.
Millennial, beware: Banks, issuers and other lenders aren’t the only people pulling your credit file. Utility companies, cellphone providers, landlords and insurers also will ask for a credit report when determining whether they want to do business with you.
And many employers will consider your credit report, sans credit score, as part of their interview process.
“They’re looking to get a feel for your background,” says Beverly Harzog, author of “Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made.” There may be the perception that “if you don’t have a good-looking credit report, you might be a high-risk employee,” she says.
Something else important to keep in mind as you search for that dream job: Under the Fair Credit Reporting Act, employers must request permission to check your report.
Businesses “almost always ask, but they don’t have to,” Griffin says. “If you’re filling out an application, look at the fine print.”
Don’t worry, lenders aren’t the only ones who can see your credit report; you can check it, too. Thanks to the Fair Credit Reporting Act, everyone is entitled to 1 free credit report from each credit bureau every year.
Take advantage of this perk, even if you’re not looking for a loan.
“You want to be sure there aren’t any errors on it because they can drag down your scores,” Harzog says.
“It’s a great way to spot fraud,” she says. Inaccurate personal information or mysterious accounts on a credit report could indicate your identity has been compromised. (Now you know what to do after the next big data breach.)
Get your free credit report by visiting myBankrate.
If you do spot errors on your report, contact the bureau immediately. Dispute instructions should be available on the bureau’s website.
“If you find something, you can talk to us,” Griffin says.
Keep in mind, the free reports you’re entitled to won’t contain a credit score. You can purchase 1 for a small fee. There are also websites that offer free versions of your score.
The emphasis here is on “versions,” since there are lots of scores out there. FICO and VantageScore are 2 well-known scoring models, but even the versions of these you see may be different from the 1 your landlord is requesting.
“Lenders have a lot of their own proprietary scores” that they use during the loan application process, says Sarah Davies, senior vice president of product management and analytics for VantageScore.
Don’t let these variations keep you from finding out your score.
“All those scores are generally saying the same thing,” Davies says. To determine your overall credit clout, don’t fixate on your number. Instead, identify the range that’s being used by a model and see where you appear on the spectrum.
If your score is solid, for instance, “you can use that as leverage” to negotiate better prices on loans and contracts, Harzog says.
Some personal information, including your current and previous addresses, telephone numbers and date of birth, may appear on your credit report, but it won’t influence your actual score.
Instead, credit scoring models use some combination of payment history, debts owed, available credit, length of credit history, types of credit and those aforementioned credit inquiries to come up with your number.
“The longer you’ve had the loans on your file, the more powerful that information is,” Davies says. That means your elders are likely to score higher in “the length of credit history” category, given they’ve had access to credit longer.
If all this is making your head spin faster than the plot of “Inception,” focus on payment history.
“The most important thing (millennials) can do to keep their scores high is to make all their credit card and other loan payments on time,” Brobeck says.