Credit Score and Credit Report: The Invisible Man
Also Readable: Credit Report- Are You Ignoring It?
Morality Grandpa
Does it sound eccentric? Perhaps it does and will until you have finished reading it. What did not our grandpas tell us so that we might be good men when we grow up? They told tales. They professed proverbs. In today’s world, those morals are just losing out to newer realities. Many of them are losing their value. Many of the proverbs are getting out of place in the present day context. No good news. But truth is truth.
As a finance blogger, one such morality proverb often pops up in my mind. I was looking for ways to make use of it some day. While contemplating writing about credit report and credit score, this again came to my mind.
Neither a lender nor a borrower be. Do today’s grandpas tell their grandchildren this saying? Or will tomorrow’s grandpas tell their grandchildren this proverb? For myself, I am never going to tell it to my grandchildren when I become a grandpa.
Why?
Just read the shocking excerpt from nerdwallet.com
The average US household credit card debt stands at $15,191, the result of a small number of deeply indebted households forcing up the numbers. Based on an analysis of Federal Reserve statistics and other government data, the average household owes $7,087 on their cards; looking only at indebted households, the average outstanding balance rises to $15,191. Here are statistics, trends, studies and methodology behind the average U.S. household debt.
Current as of April 2014
U.S. household consumer debt profile:
- Average credit card debt: $15,191
- Average mortgage debt: $154,365
- Average student loan debt: $33,607
In total, American consumers owe:
- $11.68 trillion in debt
I Would Rather
tell my grandchildren how to be a good borrower. No fun! I would rather tell them how not to go defaulter. And I would rather tell them how they can borrow more and repay, if they are fated to be borrowing. Do I sound sarcastic?
My Grandchildren and the Invisible Man:The Teaching Begins
I would assume a grave pedagogical voice and tell my grandchildren—
My dear Grandsons, today, I am going to teach you a very important lesson. The lesson is about credit score. As citizens of America, sons of the great Uncle Sam, you cannot escape learning it. Attention required!
But I am not going to tell it like your economy teacher. I think you will enjoy it better as a story. And the name of my story is The Invisible Man. Here we go:
You have a financial observer invisible to you. He will always have been watching you when you grow up. You can never see him because he is not human. His abode is the Credit Bureau. Do you understand what Credit Bureau is? Well, it is an office that works for our government.
The kiddies might ask me: How does he see us, grandpa?
Well, he has several eyes. Of them four are the main. Each eye has their own names. The right one is called Experian. The left one is known as TransUnion. And the one in the forehead is named FICO. There is one even in the back of his head. Its name is Equifax. So you learned the names of their eyes.
One of the kiddies might ask: Why does he watch us? Then the younger one might put in a question: Is he a monster?
No, he is no monster! He is rather a friend for you. He only sees how you deal with the money you borrow from banks or credit unions and keeps records of this. He notes down all your credit activities like if you pay your bills in time or not, if you are in debt or not, if you have gone bankrupt or not etc. He also sees who and when you are paying back money as well as if you are sued for not paying etc.
Why does he do so?
Look, he does this to keep you in check. Look you cannot sometimes help borrowing. You look for loans then. If he does not keep record, you may keep borrowing and spending at your sweet will. The money you spend belongs to your country. For inconsiderate spending, both you and your country will be in trouble. Uncle Sam cannot let it happen, can he?
So he sends the invisible man behind you and sends your records to lenders when they ask him. Got it?
Hmm. Does he punish us if we are bad?
Well, the answer may not please you. I mean the answer may be both yes and no. He does not directly punish you for being a bad spender. Instead he gives you marks. It is much like your school GPA. At school, the higher your GPA, the better you are, right? Similarly, the Credit Beauro gives you scores. The higher the score, the better a scorer you are.
Hmm, understood. Does it have promotion like in school?
Lol. In a way it does. With higher score you have better chances for easily getting larger loans. On the other hand, you may be denied loans with poor scores.
Could you tell us about the way the invisible man gives scores?
Sure. But you need to know about credit history or credit report first for that. Didn’t I tell you the invisible man keeps records of how you spend the money you borrow? I did. Now, he does not directly give you marks. Marks — do you understand? I mean scores. Your activities are recorded in words. This is called credit report or credit history. Now the four eyes of the invisible man have their own ways to give scores.
You say ‘their own ways’. How will their scores match?
That’s smart of you as ever, Matt. Their scores may vary. But they will not vary greatly.
Can I ask the invisible man to show me my credit report and credit score?
Good question, Pete. You can. The four eyes I mentioned a while ago have their own offices and websites. If you contact any of them, they will send you your credit report for free. But you cannot get it more than once within a twelve months time. But they will not give you the credit score for free. You have to pay bills for it.
Go get your notes Pete and Mark and write down their website addresses.
Grandpa, you did not tell us about good or bad scores.
Oh, I just forgot. FICO, Transinion and Equifax use a range of numbers to give scores. Equifax’s range starts at 280 and ends at 850. FICO and Trnasunion’s scores range from 300 to 850. And yes, Experian’s range is between 330 to 830. Now the higher your range, the better your prospects for getting loans.
How do I understand what is a good score and what is bad one?
Hmm! Generally a score up 720 is excellent. Just like A+ in your school grade. A score between 680 and 719 is good. And if it stands between 679 and 620 it is average. If you are below any of these ranges you are poor.
Mark and Pete, I am finished. What do we learn from today’s story?
We must try to make excellent credit scores. (Mark and Pete simultaneously.)
Me — and for that, we have to pay back our loans in time! We shall never borrow more than we can repay.
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