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 Do I have your permission for a few minutes to do some truth-talking? I hear so much talk about credit scores. People think their financial life revolves around their credit score - a number. If their credit score is low, they feel shame and humiliation. If their credit score is high, they feel confident and proud. I even heard one woman say that she wanted an 850 credit score (a perfect score) because that showed that she was “ethical” and had “integrity”. Uh, what?

Here’s some real talk about your credit score.

Your credit score is determined by an algorithm set by two companies. The Fair Isaac Corporation (FICO), which is why it’s called a “FICO Score”, and VantageScore. Both firms build and update these algorithms. Your credit score changes all the time and you could even have two different credit scores at the same time, depending on what “model” was used (there are several). Whether you are applying for a credit card, home loan, or car loan will determine which “scorecard” a bank uses. A “model” is the specifics of the algorithm used to build your score. An example of this is how they calculate in the algorithm a lofty student loan, versus a missed credit card payment.

Within these “models”, VantageScore and FICO create slightly different custom versions of the scorecard for each lender. There are versions for getting a credit card that are slightly different than the ones used for getting a car loan. A bank issuing a credit card wants the most accurate information possible on whether a customer will pay his bills, not whether he will pay his mortgage. Your credit score is just a number that answers this question for your lender: “What is the likelihood that this consumer is going to be delinquent on this debt within the next 24 months?”

Your credit score can change daily, depending on several factors. Don’t be so obsessed about the exact number of your credit score if it drops a few points overnight. It can also vary across the three main credit reporting agencies, Experian, Equifax and TransUnion.

Here are some factors used in determining your credit score:

1) Payment History (35%)

2) Amount Owed (30%)

3) Length of Credit (15%)

4) New Credit (10%)

5) Types of Credit (10%)

There are also three important things you should know:

1) Credit agencies only go back seven years. Your account information is removed from your credit report seven years after the last activity on that account, with these exceptions:

a) If you’ve filed for Bankruptcy, this will take 10 years to fall off your report.

b) If you become delinquent with your student loan, it never drops off your credit report. The only way to get that off your credit report is to pay off the loan, then make sure that the collection agency notifies the credit bureaus that you have paid it off so they can remove it from your report.

When it comes to mortgages, a 740+ score qualifies you for super prime rates, which are the best rates, and the same rates you would get with an 800+ credit score. (Again, this is a general statement and some lenders may have different requirements.)

Unless you are a millionaire or financially free and can pay cash for your homes and cars (and everything else for that matter), you need a credit score. So let’s look at some credit score myths.

Myth: “I must strive to reach the ‘perfect’ score.” Or, “The higher the score the better.”

Truth: Some people strive to get to that 820 - 850 mark. My boyfriend and I even had a competition to see whose score was higher every month. The thing is, there’s such a thing as a too perfect score. Credit card companies don’t want you to be perfect. If you have a perfect score, it’s likely you don’t have many credit cards, and you have had the same card for decades and don’t really use it. They won’t make any money off of you. Sure, they’ll issue you a card...gladly. But your limit most likely will not be as high as someone with a 760 score.

Myth: ”I can help you remove your collections, inquiries, tax liens, student loans, bankruptcy, and late payments!” (From a credit repair company).

Truth: Beware of credit clean-up scams. The ONLY information that may be legally removed from a credit report is inaccurate information.

The truth is, low credit scores can affect your ability to buy a home or a car. It even affects your car insurance rates, and may also affect your ability to get a specific job. So your credit score does matter, but it doesn’t have to be “perfect”. If you aim for a 740 - 760 score, you will most likely have the same interest rates as someone with an 800+ score.

If you are not sure what your credit score currently is, you can check out Credit Karma. Use the tool, but be aware of their "you need 17 credit cards to boost your score" philosophy. How do you think they're making their money offering a "free" tool for you to use? Don't fall for it.

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