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How Credit Savvy Are You? Take Our Credit Score Quiz

 
By Eva Norlyk Smith, Ph.D.
August 20, 2010

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Next to annual income, few numbers are as important for financial freedom as one’s credit score. FICO scores range between 300 for bad credit to 850 for excellent credit, and to get the very best terms on mortgages, loans, and credit cards, it’s best to have a FICO score above 760.

Improving and maintaining a credit score in that range isn’t rocket science, but it’s important to stay on top of the factors that influence credit scores. To test your credit score savvy, take this quick Credit Score Quiz.

True or False?

1. You don’t have to worry about your credit score, unless you’re planning to take out a mortgage or car loan or apply for a credit card or other type of credit.
2. You don’t have to have a lot of money to get a good credit score.
3. It takes a long time to build a credit history.
4. Having lots of credit cards is bad for your credit score.
5. Having debt pulls down your credit score.
6. Missing a credit card payment once in a while is okay as long as you continue to pay next month.
7. It takes a long time to improve your credit score
8. It takes 5 to 7 years to clear up bad marks on your credit report.

Answers:
1. You don’t have to worry about your credit score, unless you’re planning to take out a mortgage or car loan, or apply for a credit card or other type of credit.

False. Your credit score doesn’t just determine the interest rates paid on mortgages and other types of loans, but also how much you’ll pay in insurance on your car or home. Further, most prospective landlords pull a copy of a person’s credit report, so people with bad credit may find it difficult to find a nice place to live. In addition, most employers screen applicants by looking at their credit score.

2. You don’t have to have a lot of money to get a good credit score.

True. Unlike applications for mortgages and other loans, credit ratings are not based on a person’s income. Someone with a low income can easily develop excellent credit and get access to the best terms for loans and other credit products. It is simply a matter of paying bills on time, not keeping high balances on credit cards, and over time, building a varied credit history that show that you can handle credit responsibly. Of course, people with limited income may find it more difficult to stay out of credit card debt and other types of debt, and excessive debt levels will lower credit scroes.

3. You can build a credit history quickly.

True. These days all credit reporting is computerized, so you can build a basic credit history in as little as 6 to 12 months. People without any previous credit history are typically started out with a score in the 600-range. You can begin to build a good credit score by applying for one or two credit cards and opening a checking and/or savings account, if you don’t already have one. From there, it’s simply a matter of demonstrating that you can handle credit responsibly: keep credit card balances low (ideally 10 to 30 percent of the credit limit) and pay all bills on time, without fail, every month.

If you find it hard to get approved for a credit card, invest in a secured credit card which is backed by money you put into the account.

4. Having lots of credit cards is bad for your credit score.

False. Having lots of credit cards isn’t in itself bad. If the cards are used responsibly, it could actually help your credit score. Lots of people with near perfect credit scores carry as much as 7-10 credit cards. The more credit cards a person has, the higher the total available credit, which means that it is easier to keep the credit utilization ratio low. The credit utilization ratio is a measure for how much of the available credit across all cards is used each month, and this ratio makes up a full 30 percent of FICO scores. With lots of credit cards, it’s easier to keep this ratio below 10 percent and get the highest rating on this component of credit scores. The trick is not to use all of the cards each month, to keep balances low on the cards used, and pay the balance off in full each month. (If you have multiple cards, be sure to alternate the ones used, as card issuers at times close inactive accounts.)
Of course, the opposite can also be true. Having lots of credit cards with high balances will wreck your credit score faster than you can say “FICO.”

5. Having debt always pulls down your credit score.

False. Having a variety of different types of debt like credit cards, a car loan, and a mortgage will actually improve your credit score, as long as it’s not excessive levels of debt and as long as the debt is handled responsibly. That again means following the three credit score mantras: pay all bills on time, keep balances low on credit cards, and preferably, pay all credit cards off in full each month.

6. Missing a credit card payment once in a while is okay, as long as you continue to pay next month.

False. Missing even one payment is a sure way to torpedo your credit score. That applies not just to credit cards, but to all other loan payments as well. Lenders view missed payments as a sign of financial instability, and even one 30-day late payment can cause your credit score to drop by several hundred points.

7. You can improve your credit score in less than a year.

True. People with low credit scores can raise them by as much as 100 points or more in a year simply by getting current on any past due payments, reducing the outstanding balances on their credit cards, and paying every single bill on time.

8. It takes 5 to 7 years to clear up bad marks on your credit report.

False. If you do nothing, it’s correct that bad marks like notices about collections and missed payments will stay on your report for as long as 7 years. However, if you’re proactive, you can often clear up bad marks by e.g. writing a goodwill letter to collection agencies asking them to remove collection reports for past due debt you’ve cleared up.

In addition, pulling your credit report and disputing inaccurate information can go a long way to remove bad marks on the report. Credit agencies must correct or delete the following types of information from your credit report:

• Disputed information which the lender fails to verify;
• Erroneous information that you can document is incorrect
• Incomplete information that hasn’t been updated, such as e.g. a late payment that has since been made current.

Scoring:
7-8 correct answers: Excellent—your Credit Score savvy is right up there with the experts’; apply your knowledge, and you should enjoy top credit scores all life.
4-6 correct answers: Good—with a little bit more reading, you might learn some more useful facts about how to boost your credit score.
1-3 correct answers: Well, it’s a good start, but your finances would likely benefit from a little more education about credit in general and credit scores in particular.


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