20 Things Every Twentysomething Should Know About Credit Scores

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If you admittedly don't understand much about credit scores, you're not alone.

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They're often misunderstood. But, they can be a powerful tool in achieving some financial and lifestyle goals — like buying a house. So don't wait until the very last second to start paying attention to your credit score!

So we rounded up a few ~helpful hints~ about credit scores you should probably know sooner rather than later:

1. Surprise! You actually have more than one credit score.

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Just add this to the list of things we found out about when we were today years old. You can actually have several different credit scores. This is because credit scores are calculated using different scoring models. If you're in the US, the most commonly used models are FICO and VantageScore.

And that's not all: There are also a number of different versions within those scoring models. But we'll get into that later.

2. A FICO score is a type of credit score.

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The two aren't totally different, though. Think of it this way: A FICO score is a credit score but a credit score is not always a FICO score. No wonder they might've sounded familiar!

3. But it's the one you should pay most attention to, since lenders typically use FICO scores to decide whether or not you'll be approved for a loan.

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"At the end of the day, the only one that really matters is the one that gets looked at when you’re trying to get a loan," said Jim Droske, president of the Illinois Credit Services. "Right now, that’s usually the FICO score."

FYI, your FICO score is used by 90% of US lenders to determine whether or not they'll give you a loan or credit. So you might wanna keep an eye on this score to make sure it stays nice 'n' ~healthy~. Of the three credit-reporting bureaus (Equifax, Experian, and TransUnion), Experian gives you access to your FICO score. Equifax and TransUnion allow you to monitor your score based on the VantageScore model. However, lenders can pull either score from all three bureaus based on your credit report; so if you're going to apply for credit or a loan, it's a good idea to check all three reports first.

That's not to say the VantageScore is never looked at by lenders — it can be, or they may choose to use a different scoring model altogether. The FICO score is just the one that's most widely used in lending decisions.

4. The specific FICO score version lenders look at may depend on the type of loan you apply for.

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The different versions within the scoring models tend to be industry-specific to help lenders more accurately determine your risk for a certain type of loan.

These days though, the FICO Score 8 is the one most commonly used in general lending decisions, like applying for a credit card or car loan. When it comes to mortgages, however, lenders may refer to an earlier FICO Score version (usually FICO Score 2, 4, or 5).

5. Rest assured: Checking your own credit score does NOT lower it. This is known as a "soft inquiry."

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If you've ever avoided checking your credit score because you thought doing so would lower it, you're not alone. There are actually two kinds of inquiries when it comes to your credit — soft inquiries and hard inquiries (more on that later). Taking a look at your own score is considered a soft inquiry; it won't make your score drop 30 points just because you took a quick peek at it.

6. In fact, keeping an eye on your credit score is actually a good habit to get into.

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As the saying goes, knowledge is power. Being aware of your credit score can help you improve your finances. You'll be able to figure out whether your current financial habits are keeping you in a healthy score range. If your score is lower than you'd like it to be, this could be a sign that you need to make a few changes.

You can sign up with Experian to keep an eye on your FICO Score — for free, might I add — since that's often the score looked at by lenders for general lending decisions.

7. However, when a financial institution (like a lender) checks your credit, it's known as a "hard inquiry" — and this can affect your score.

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So like we said, checking your own credit score is a soft inquiry that won't affect your score. Hard inquiries, on the other hand, occur when you apply for a new line of credit and a lender looks into your credit history. Their deep dive appears on your credit report and can, in turn, lower your score a bit (but usually not enough to cause a panic!).

"What if you apply for a Target or Kohl's credit card and go shopping for a car loan?" Droske mused. "That could affect your credit because you’re shopping for new credit. If someone has the ability to extend you credit, that’s a hard inquiry and that is what will be calculated into your credit score."

So while applying for a loan or any other type of additional credit can lower your score a bit, it wouldn't totally demolish it as long as your score is in a healthy range.

8. Your credit score isn't set in stone. If you have a "bad" score now, it doesn't mean it'll be that way forever!

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Good habits — like consistently making credit card payments on time — can, over time, help you improve a bad score. And having a healthy credit score can be beneficial in the long run.

Sometimes, it may take a while for you to finally reap the rewards of good credit habits. But if you're in more of a pinch or just want a faster way to bump up your score, Experian Boost is a free service that might help improve your FICO score by several points instantly. Once you set up your Experian account (which you can also use to monitor your score), you just connect the account you use to pay your bills so you can get "credited" for making on-time payments. These could potentially bump up your score — maybe even by just enough to get into a new range. Think of it as a little reward for paying your phone bill and Netflix subscription on time.

9. Your score can also affect the kinds of interest rates you receive on loans.

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OK, so now you already know that having a good score can influence whether or not you get approved for a loan or line of credit. But another advantage of having a credit score that's in good shape is getting lower interest rates on the money you borrow.

10. It's totally normal for your credit score to change by up to 15 points at any given time. Yes, by that many points!!!

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Sometimes, your score might drop and you have no freakin' idea why. How could this be?? You've been repaying your debts and making credit card payments on time every month. So what's the deal??? Well, your scores change when the info in your credit reports change, which can happen quite regularly. Your reports contain info on balance changes, new accounts that have been opened, accounts that have been closed, and your debt-to-credit ratio, to name a few.

"There’s an organic up and down of credit scores called a healthy score migration," Droske said. "Scores can change up and down by 10 to 15 points at any given time and any given month." Plus, you may even see a slightly different score when you check it through different services.

Again, a tiny score drop is nothing to stress about if your score is already in a good range (are you noticing a pattern here?).

11. Lose the mentality that if you don't have a credit card, you won't have bad credit.

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In fact, if you don't have a credit score, you might be seen as a risky borrower. If that's the case for you, don't fret: This could be because there just isn't enough info in your credit history to devise a score for you. You see, your payment and borrowing activity get calculated into your credit score, so if you don't have any good credit activity to show, the credit scoring models won't have much to go off.

"If you don’t have a credit card, you aren't giving lenders enough clues about your activity," Droske said. "If you aren’t displaying credit card activity, they aren’t confident in your ability to manage this debt."

Bottom line: You can run from credit cards, but you can't hide. You can totally survive without opening up a credit card if you have a fear of overspending, but avoiding credit cards altogether won't necessarily give you excellent credit. In fact, using them responsibly can actually help you build good credit. To start, you could consider opening a secured credit card. This works similarly to a regular credit card, except it requires a security deposit to cover any potential missed payments.

12. You payment history has the biggest impact on your credit score — so missing a debt payment can be more detrimental than you might think.

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Making on-time payments = extremely important. Every scoring model uses different factors to calculate credit scores, but generally speaking payment history is the most important one. Lenders will want to make sure that you can make payments on time. Even one missed payment can lower your credit score. It actually kinda feels like getting grades in school; you get all these As in so many classes, but it just takes one C- to lower your GPA. Ugh.

Mark your calendar, set a reminder on your phone, leave sticky notes around the house, or set up automatic payments. Do whatever works to help you never miss a payment.

13. Credit utilization also plays a pretty big role in determining your credit score.

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In fact, it's usually the second-most important factor. Credit utilization is a fancy term for talking about the amount of credit you've used compared to the amount of credit you have available. You might have seen or heard it expressed as a percentage, and many experts recommend trying to keep your credit utilization below 30%. High amounts of debt compared to your credit limit can seriously pack a punch.

So one way to help improve your credit score = paying off some consumer debt to lower your credit utilization rate. Here are some tried-and-tested ways to pay off credit card debt.

14. But wait, there's more! There are a number of additional factors that determine your credit score.

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While again, these can vary depending on the scoring model, the most commonly examined factors include: credit history length, credit mix, and new credit.

Your credit history length is the amount of time you've had credit accounts. It can actually go as far back as your very first credit card!

Credit mix refers to how diverse your lines of credit are. A diverse credit mix could mean having a credit card, a student loan, a mortgage, and a car loan. These lines of credit can help a lender decide how well you manage each type of debt.

Lastly, new credit encompasses any new credit accounts you recently opened and any hard inquiries that have been made. Although it usually only makes up a small percentage of your score, opening up too many new credit accounts in a short period of time can be viewed as a sign of riskiness.

15. Paying off installment debt doesn't actually improve your credit score.

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Sorry to be the bearer of bad news, but what you thought you knew about paying off debt may not be true. Not all types of debt have the same impact on your credit score. According to Droske, paying down credit card debt absolutely can help you improve your credit score. However, installment debt — a loan that is repaid as defined monthly amounts over a specified time period — doesn't improve your score. You possibly even have a very common example of installment debt parked in your driveway in the form of a car loan.

"People tend to pay off installment loans sooner because they think that’s going to increase their score," Droske said. "They think, 'I borrowed money for a car loan for 16 months but I paid it off in 8 months.' That is not improving your credit score. It’s not a good [money management] clue for lenders. Paying off an installment loan early just means you had the money to do it."

16. Despite common ~myths~, many personal and financial factors, like getting married or your level of income, do not influence your score at all.

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Your credit score will always be your credit score. It doesn't combine with your spouse's. "Getting married doesn’t combine your credit obligations and therefore, it doesn’t combine your scores," Droske said.

Your debit card balance doesn't affect your credit score, either. Debit cards are connected to your personal bank account and are not forms of credit. So if you've been worrying about whether or not a recent debit card overdraft will lower your score, don't. It won't impact your score.

And BTW, your income also doesn't influence your credit score. Lenders might consider your income when you enter a new credit request, but your salary is NOT factored into your credit score.

17. And it might sound counterintuitive, but closing a credit card might actually negatively affect your score.

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This goes back to that handy, dandy idea of credit utilization. When you close a card, you're basically lowering your total amount of available credit. That, in turn, can increase your credit utilization percentage. And now we all know how important that percentage is when determining your credit score.

"Let's say you have two cards with a $1,000 limit for each," Droske devised. "One of them has a $500 balance on it and the other has a $0 balance. In this case, your utilization is $500 divided by $2,000 — a 25% utilization. That's not bad. But if you close that card with a $0 balance, your utilization goes from 25% to 50%. Without even charging additional purchases, you can lower your score in this way."

You should generally try to avoid closing a credit card. However, there may be some scenarios where closing your card can actually be a good step toward improved finances — like if you feel like you're drowning in those annual fees or if you need to curb your spending.

18. Increasing your credit limit isn't necessarily a bad thing. And it could help improve your credit score in the long run.

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So, your score might take an initial dip if your credit card company runs a hard inquiry before increasing your credit limit. But, having a higher credit limit (while maintaining a relatively low level of debt) can improve your score over time. Again, it all comes right back to credit utilization (you should probs go back and read #9 if you skipped it).

"You always want to have the highest credit limits you can," Droske said. "If someone will give you $20K tomorrow, take it. You want to have the highest credit limits because it keeps your utilization low." However, you should be intentional with when you ask for a limit increase. Don't request one too often.

One caveat: There may be instances where you probably shouldn't ask for or accept a credit limit increase. For example, if your spending is out of control, it might not be a good idea to add fuel to that shopping fire.

19. You don't need to have a "perfect" credit score. In fact, it's very difficult to obtain one.

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The most important thing is that your score is ~healthy~. While achieving an 850 score sounds like peak adulting, it's more than enough to just be in a "good" score range.

"You can obtain it, but it's unnecessary to try to get it that high," Droske said. "It’s hard to do because everything has to align perfectly, but it’s absolutely possible." And, hey, maybe one day after reading this post and becoming more of an ~expert~ on all things credit, you will get that perfect score!

20. And don't worry if you feel like you're very far off from getting into a healthier score range. Good financial habits can help you recover from a low credit score.

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Low credit scores won't last forever, as long as you're taking steps to improve any habits that can actually hold you back. While it may feel like a bad credit score is banishing you to the realm of high interest rates and anxiety when it comes to getting approved for loans, time can actually help you see the progress you want.

If this sounds like music to your ears (and bank account), check out more of our personal finance posts.