Today we are breaking down credit scores and credit freezes.
In fact, these are two of the most misunderstood retirement planning topics.
So if you want to know exactly…
- What a credit score is and why it’s important
- How to (quickly!) improve your credit score
- Step-by-step how to process a credit freeze
…then you’re going to love this actionable guide.
First, pocket these free resources (no email required!) 👇:
- Am I At Risk of Having My Identity Stolen or Being a Victim of Fraud? [PDF Checklist]
- Documents You Need to Have on File in Case of an Emergency [PDF Checklist]
What is a Credit Score?
Let’s define credit score.
Your credit score is a numeric representation (and prediction) of how good you are at borrowing money and paying it back.
The most popular type of credit score – the FICO score – is determined using a low score of 300 and a high score of 850.
A high credit score tells banks and credit card companies you’re the type of person who will pay back the money you borrow.
A low score tells them you may not be reliable enough to lend money to. (Note: Your credit score varies slightly for each credit-reporting agency.)
Your score increases or decreases depending on what actions you take (or don’t take).
How do credit reporting agencies know your worth as a borrower?
The three credit reporting agencies – Experian, Equifax, and TransUnion – predict your credit score because they track the following factors:
- How often you pay your bills on time
- How long you’ve been paying your bills on time
- How much money you owe to others
- How many loans or bills you’re having problems paying back
- How much money you can borrow, but have decided not to (i.e. your available credit)
Checking Your Credit Report & Your Credit Score
If your head is swimming with different terms, credit-reporting agencies, and monitoring websites, we can empathize.
Let’s break it down.
Your Credit Report vs. Your Credit Score
What’s the difference between your credit report and your credit score?
Your credit report is your full credit history, containing the information that makes up your credit score.
Your credit report lists month-by-month payments made (or missed) to creditors.
A credit report gives you the transparency you need to check the accuracy of the information so that you can take action to correct any erroneous information. (We’ll discuss this below).
Think of your credit score as a summary of your credit report.
Your credit report is a multi-page document listing years of payments made (or missed) to creditors.
Your credit score sums that all up with just three simple digits.
How do You Check Your Credit Score & Credit Reports for Free?
For credit reports, the U.S. government-mandated website AnnualCreditReport.com is a great resource.
You are entitled to one free credit report from each credit-reporting agency each year.
“That means three credit reports a year – for free!”
Given this, consumer expert Clark Howard suggests pulling your credit report from a different agency every four months. This strategy lets you review your credit history three times a year for free.
For your credit score, you’ll be happy to know that there is an ever-increasing number of options to check your credit score for free.
For example, Discover lets you monitor your credit score for free, even if you aren’t a customer.
You can also use a service such as Credit Karma to monitor your credit score for free and to access your credit reports.
Remember, you don’t have to pay ongoing fees to the credit reporting agencies to view your credit score.
There are plenty of free and simple ways to monitor your credit movements without forking over your hard-earned cash.
Exactly What to Look For in Your Credit Report
When reviewing your credit report, look to see if any companies look unfamiliar to you. If so, it may be identity theft.
If you think you’re a victim of identity theft, click here to follow the steps needed to take quick action.
Also, be sure to check for errors. Even if there isn’t identity theft, don’t assume that the credit-reporting agencies got it right.
If you find an error, here is how you can dispute the information with the credit-reporting agency.
7 Ways to Improve Your Credit Score
Everyone should be working to improve their credit score. Here are seven of the best ways to do it.
1) Don’t Pay Interest to Boost Your Credit Score…It’s a Myth!
Many people falsely assume that paying interest on a debt balance can help their credit score. This is absolutely false.
Carrying debt can hurt your credit score if you have high credit utilization.
Credit utilization is the ratio of how much debt you owe relative to your total debt limit (determined by the creditor).
Take our friend, Joe Credit, as an example:
American Express gave Joe a fancy gold credit card with a max spending limit of $10,000.
Joe booked a vacation for his family on his new Amex that set him back $6,000. Joe has used $6,000 of the available $10,000 limit.
His credit utilization ratio is 60% ($6,000 / $10,000 = 60%).
To boost your credit score, pay off your debts and keep your credit utilization low. This will outweigh any positive impact of continuing to pay interest on your debts, as the myth goes.
Remember: you want a low amount of debt owed and a high total debt limit.
2) What is the Best Credit Utilization Ratio
So, how low should you go?
You should aim to keep your credit utilization ratio below 30%. In a perfect world, you should target less than 10%.
If you have a single credit card with a $10,000 limit, for example, you’ll want to make sure you owe less than $3,000 at any given time. Just by following this rule, you can give your credit score a lot more potential to surge.
3) Avoid Closing Your Credit Accounts
If possible, avoid closing credit cards. When you close a credit card, you close your available credit limit with that card. This effectively decreases your total debt limit.
Consider this example: You have two credit cards, and they each have a $1,000 limit. You carry a $500 balance on one card and a $0 balance on the other. This is fine for your credit score because you’re still under the 30 percent credit utilization rule.
But, if you close one of the cards, you’re now over the 30 percent rule. That’s because you now owe $500 on a credit card with a $1,000 limit – or 50 percent of your credit limit.
Using this much of your available credit will absolutely hurt your credit. This is why it often makes sense to keep credit cards open, regardless if you’re using them.
So, if you’ve fallen out of love with a credit card, but don’t want to close it, here are two things you need to consider: avoiding annual fees and keeping the accounts active.
4) Avoid Annual Fees on Credit Cards
Just as with investing, you want to avoid fees. It doesn’t make sense to keep a credit card open just for your credit score if you’re paying money every year for the privilege.
There are countless credit cards available without an annual fee that will give you the same benefit.
If your favorite credit card charges an annual fee, call your bank to see if you can downgrade your card to a no-fee version.
This way, you can keep that card’s account history without paying the annual fee. You may lose some of the credit card benefits if you downgrade, so that’s something to consider.
5) Keep Your Accounts Active
To keep your account active, make sure you actually use each credit card at least a couple of times a year. Even making a small purchase every few months will keep your account active.
Clark Howard even suggests purchasing a gallon of milk a few times per year on each card just to keep them in good standing.
If it’s too much work to remember to use each card, then set up a recurring payment for those cards you use less frequently.
You can set up automated monthly donations to a canine rescue group, your gym membership, or your music and entertainment subscriptions.
That way, your credit card remains active without you having to think about it. (This is called automation – and we love it, especially for saving money!)
6) Don’t Get Carried Away
I notice that many clients take pride in their credit score. However, some clients can overdo it or obsess over it.
The thing is, any score of 800 or higher will get you the greatest rates.
myFICO ranks any score between 740 and 799 as “very good.” Per myFICO on their website,
“This score range is also above the national average and borrowers in this range are at a great advantage in both the likelihood of getting credit approval and being offered lower interest rates.”
While you should try to grow your score as high as it can go, consumer expert Clark Howard says that a score over 740 won’t get you much more than bragging rights.
When it comes to your credit score, you don’t have to be perfect. You just have to be good.
If you treat your credit with care and respect, pay back what you borrow, and keep your credit utilization low, your credit score will eventually reflect this.
7) Beware of Credit Repair Services
Reducing credit balances, keeping credit lines open and active, and making timely payments are sure-fire ways to boost your credit score.
However, there is one thing you likely want to avoid: credit repair services. Credit repair companies frequently exploit a trick that only temporarily raises your credit score.
If you want to avoid temporary fixes and need more ideas for getting fast results, check out this comprehensive guide to learn how to quickly increase your FICO score the right way.
What is a Credit Freeze? Protecting Your Credit Score
You’ve started down the path of mastering your credit score! Good job. Give yourself a pat on back.
Since you’ve put in all that hard work, let’s make sure that you get to take advantage of your superb credit score – and not an identity thief.
After all, it seems like we’re hearing about a new data breach every day of our lives:
- The recent Capital One data breach exposed over 140,000 Social Security numbers.
- The infamous Equifax data breach may have impacted as many as 147 million consumers in the U.S.
- In 2015, a data breach at Scottrade exposed Social Security numbers of 4.6 million customers.
There’s more to the list. But I won’t bore you.
Instead, let’s talk about how you can protect yourself from would-be identity thieves.
Credit Freezes are Better than Credit Monitoring, or Anything Else
We recommend freezing your credit. When you freeze your credit, no one (including you) can open a credit account in your name.
A credit account can be a plain-vanilla credit card, a home mortgage, or a loan for a new set of wheels.
A credit freeze is akin to putting a lock on your front door.
A credit monitoring service is like installing an alarm system.
The credit monitoring service won’t prevent people from impersonating you. It just sounds the alarm after someone has already broken into your house.
With a credit freeze (the lock on the door), you can prevent people from impersonating you. The credit freeze is a preventative measure and one of the easiest ways to protect yourself against identity theft.
Despite what companies like LifeLock would have you believe, credit monitoring is arguably a worthless service – and certainly not worth paying for!
Credit Freezes are Free
Speaking of stuff not worth paying for, don’t get confused by a “credit lock.” A credit lock is not the same thing as a credit freeze.
While both a credit lock and a credit freeze restrict creditors from accessing your credit report, only a credit freeze is available without fees or other requirements.
While the credit reporting agencies may tout the convenience of “locking” your credit with the touch of a button on your phone’s app, you may have to pay $300 a year for the privilege.
Credit Freezes are Better than Fraud Alerts
Therefore, a sophisticated criminal could theoretically bypass the safety check – if they know enough about you, etc.
Whatsmore, fraud alerts only remain in place for a single year – requiring you to renew it if you want the feature to remain in place.
Clark Howard Credit Freeze: Step-by-Step
There is only one way to do a credit freeze — directly with each credit reporting agency.
So, how do you process one?
Check out Clark Howard’s Credit Freeze and Thaw Guide for step-by-step instructions. It’s one of the best I’ve come across.
(Note: In order to start the credit freeze process, you’ll have to provide your Social Security Number (SSN) to the three credit reporting agencies. While giving out your SSN may feel nerve-racking, it’s required in order to complete this very important task.)
Remember to follow Clark Howard’s credit freeze guide referenced above and you’ll be one step closer to protecting your identity!
Keep Your Password and PIN in a Safe Place
When you freeze your credit online at the website of the various credit reporting agencies, you’ll create an account with each of them. This will include creating a password.
When you do a credit freeze via mail, you will either be issued a personal identification number (PIN) or you can choose your own PIN. It varies by agency.
Keep these PINs and/or passwords in a safe place – and avoid sharing them with anyone. If you lose your PINs, it can be a big hassle to unfreeze your credit.
Unfreezing Your Credit: Why & How
Let’s say you’ve signed up for free credit monitoring at Credit Karma and you did a credit freeze with all three credit reporting agencies (Equifax, TransUnion, and Experian). Good job!
Why Unfreeze Your Credit
At some point, someone will need to run a credit report on you. Credit reports are usually required when someone is:
- Applying for a new line of credit, such as a credit card, or mortgage loan or refinancing
- Applying for a job or apartment rental
Apply for a Credit Line with a Credit Freeze
Imagine that you’re applying for a new credit card. The bank needs to pull your credit report to decide whether they should approve you.
But the bank can’t pull your credit report if your credit is frozen. You need to unfreeze your credit for them to access your information.
Usually, your credit report is only pulled from one of the three agencies. Often, you won’t know which agency. This is because frequently not even the bank knows in advance. (The bank is only notified of the specific agency after they try to access your frozen credit.)
Avoid a Common Mistake with Thawing Your Credit
A common mistake people make when applying for credit is unfreezing their credit with all three of the agencies.
They do this to try to make it easier for the bank.
Unfortunately, this makes them vulnerable to identity theft with their thawed credit.
Instead, we recommend waiting until after you are contacted by the bank, once the bank notifies you that your request for a credit line is declined because your credit is frozen.
You can then ask the bank which agency they’re pulling your credit report from. You can then unfreeze your credit report with the correct agency.
Granted, this process does take some back and forth, which adds more time between your original application and the bank’s approval. B
ut, given the identity theft fraud and data breaches we’ve talked about, perhaps the extra wait time is worth the extra security.
How to Unfreeze Your Credit
Continuing with our example, you now know which agency to contact to unfreeze your credit.
The good news is unfreezing your credit only takes a few minutes. It can be done online, and it is nearly instant.
The moment you approve the unfreezing of your credit, the bank can re-run their credit inquiry and get the information they need. There is no processing or other wait time.
Do a Global Lift when Unfreezing Your Credit
When unfreezing your credit, you may be given two options:
- Unfreeze your credit for everyone
- Unfreeze your credit for just one person/entity
While the second option is way more secure, most entities pulling credit reports can’t seem to figure this out. This, unfortunately, means you have to choose option one, unfreezing your credit for everyone. This is usually called a “Global Lift” or “Universal Lift.”
The good news is that you also get to choose a temporary unfreeze. You can choose one day, or a few days if you want to give your bank more time. A shorter time frame limits your exposure to risk.
Step-by-Step Instructions: Applying for a Credit Card with Frozen Credit
Here are the step-by-step instructions for applying for credit when you have a credit freeze already in place:
- Apply for a new credit card (usually online).
- Receive a message that your application is being processed. (Note: if your credit is not frozen, you will often receive instant approval, assuming you have a good credit history. Of course, we don’t recommend this.)
- Receive a letter from the bank (usually via snail mail) that your application cannot be processed because your credit is frozen with credit reporting agency X.
- Contact credit reporting agency X to temporarily unfreeze your credit, with a global lift. You can do this online.
- Contact the bank to notify them you have unfrozen your credit with credit reporting agency X. Usually, the letter from the bank will have the direct phone number and likely a case number you can reference.
- Wait for your approval (or rejection) of credit from the bank. Some issuers, like Chase and Citi, can pull your report instantly, possibly while you’re on the phone with their representative. Other issuers, like Wells Fargo, can take up to two business days.
Action Items: Credit Score and Credit Freeze
Congratulations! You’ve made it to the end of our 3,000+ word blog post on improving your credit score and freezing your credit.
To celebrate your literary achievement, here is a quick recap of what we’ve covered:
- Sign up for free credit monitoring service like Credit Karma.
- Initiate a credit freeze, one for each credit reporting agency.
- Read the emails from your credit monitoring service (i.e. Credit Karma) notifying you of changes to your credit score. Check these changes for accuracy.
- Pull and review your free credit report from AnnualCreditReport.com at least a couple of times a year.
This may seem like a lot of administrative work, but it’s worth making sure your credit is protected at all times.
When it comes to identity theft, an ounce of prevention is worth a pound of cure!