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The importance of credit scores and how they work
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A survey from Experian found that only about half "somewhat" knew about credit scores. - photo by Sarah Anderson
If you dont know a lot (or even anything) about credit scores, youre not alone. About half of consumers surveyed by Experian, a credit reporting agency, recently said they were only somewhat knowledgeable about credit scores.

But it's a topic that people should be more educated about, experts say, since lenders, landlords and even some retailers use the information to determine if they want to do business with you.

Credit scores play a role in almost any financial transaction you might engage in, said Rod Griffin, director of public education at Experian, even for something like purchasing the newest iPhone. I dont think people realize that and so they may not get the latest phone, because their credit scores dont qualify.

Need for credit

While consumers soon realize credit scores come into play when applying for a loan, a credit history can also become a factor in renting an apartment, signing up for utilities or buying insurance, cellphones or other big-ticket purchases, Griffin said. And if one's history of borrowing and paying back checks out, consumers remain unaware.

Everyone needs to know about credit reporting and scoring because its such an important part of financial life, and their life in general, Griffin said. And it shouldnt seem like a mystery.

Brittani Bushman, a financial counselor at nonprofit AAA Fair Credit Foundation in Salt Lake City, concurred that its unrealistic to think that you can forge a life without good credit.

With society nowadays, credit and credit scores are becoming even more crucial, she said. It doesnt necessarily just impact loans and credit cards anymore.

Salt Lake City resident Eric Watkins, a synthetic oil dealer, learned about credit quickly after a divorce eight years ago. He found that a 10-year period of credit inactivity was a red flag that would prevent him from doing business across the country.

I thought that having nothing on your credit card would show that youre a great person, he said. It isnt.

With all that credit impacts, its vital to have a track record of borrowing and paying back, Bushman said. No history or a bad credit history could mean higher interest rates on loans, if not outright denial.

For those who have no credit history, Bushman recommended they start building it. While she doesn't recommend taking out a student loan unless absolutely necessary, she said paying off a student loan is one way to build up credit, even when it's not in repayment status.

A secured credit card is another way to build credit its a type of card designed to help people build up credit and is available at any bank or credit union. You put money down as collateral, typically at least $200 or $250, and what you put down becomes your credit limit that you can use and pay off, she said.

Once credit is established, your credit card utilization should be around 25 to 30 percent of your cards credit limit, Bushman said. Keeping it below 30 percent of your credit limit will have an significant impact on your score, she said.

To re-establish his credit, Watkins said he took out one credit card. Then he watched his utilization rate and built up his credit, until banks were automatically increasing his card's credit limit and he was getting better credit offers.

Credit reports and scores

A credit report is a compilation of your credit history that shows how youve managed your debt, while a credit score assesses your record with a number.

Griffin said to think of a credit report as a paper youve written for school and a credit score is the grade you receive on it.

The three major credit-reporting companies Experian, Equifax and TransUnion compile credit reports, and credit scores are handled by other agencies such as FICO. The setup can lead to the misconception that a person has three credit scores, when it's actually three credit reports and multiple scores, Griffin said.

We dont decide whether youre approved or declined, we dont make recommendations in any way, Griffin said of Experian. We just compile that information.

The scores that appear on reports from the three major reporting firms are usually within a few points of each other, and the middle score is often used as the deciding score. If there is a wide variance between scores, that tells the lender somethings up that needs to be looked into, he said.

There are varying scores for various kinds of loans, with a mortgage lenders score differing from what an auto lenders would be, Griffin said. FICO and its scoring system is the most well known, but there are other scoring systems, Griffin noted.

You hear people talk about THE score, and theres no such thing, Griffin said.

For the FICO scoring system, anything below a 579 is considered "Poor," and anything above a 670 is considered "good" or better, Griffin said.

But every scoring agency uses the same information from your credit report in their calculations, its just how the information is weighed that differs, Griffin said. The different kinds of lenders calculate scores to predict the odds that their particular type of customer will repay them, Griffin said.

Bushman said that there are five main factors that go into determining a credit score:

  1. Your payment history (makes up 35 percent of your score)
  2. The amount you owe (30 percent)
  3. The average length of your history (15 percent)
  4. New credit or new inquiries (10 percent)
  5. The different types of credit accounts you have (10 percent)
And the most recent two years of credit history are weighed the heaviest in devising a credit score, she said.

Knowing the factors that go into determining a credit score, along with the need to keep credit utilization low, was what was most helpful in re-establishing his credit, Watkins noted.

Credit myths

Income is not part of a credit report or credit score calculation, Griffin noted. The reality is that income isnt helpful in predicting if a person will pay their debts.

Having income doesnt mean youll use that income to pay your bills, Griffin said. You could have millions of dollars in the bank and not use it to pay your existing debts.

Similarly, theres nothing in a credit report about bank accounts such as checking or savings, Griffin said. What the report does is reflect your debt and credit relationships and predict your likelihood to repay the debts you have.

A few more myths on credit scores that Griffin cleared up:

  • Most employers can't get credit scores in the limited reports they can access so they can't use the information in hiring someone.
  • Requesting your credit report wont impact your credit score. You can look at it as often as you like.
  • Inquiries, defined by FICO's website as when lenders ask for a copy of your credit report after you've applied for new credit, impact your score minimally and for the short term. People worry too much about inquiries, Griffin said.
  • Shopping for the best rates on a home loan or an auto loan will at most count as one inquiry, and depending on the scoring system may not count at all.
Taking care of credit

If you take care of your credit report, all of your credit scores will take care of themselves, Griffin said. If you manage your credit report well, you will have good credit scores.

Two things that will ensure good credit: 1) pay your bills on time, and 2) keep credit card balances low, ideally paying it off each month. Everything else builds on that, he said.

Its also a good idea to view your credit report at least once a year, he said. And watch for any risk factors.

Every time a credit score is calculated, so are risk factors, and these are probably more important than the number itself, when it comes to knowing what to do to get a better score, Griffin said. Risk factors can include late payments or bankruptcy, and there could be as many 300 risk factors in a credit score, he said.

The numbers from different scoring systems can be very different, Griffin said, but the risk factors tend to be very consistent. So if you work on the risk factors from one score, then all of your scores will get better.

Bushman agreed that a credit report is something to be tracked, as she said 80 percent of credit reports contain some kind of error. That error could be anything from a falsely reported late payment to the wrong address listed to being mistakenly reported dead.

A free credit report, provided under federal law, can be found at www.annualcreditreport.com, Griffin said.

Watkins recommended staying on top of credit and know what it can do for you. The world he grew up in before the internet was different, without todays instant access to scores.

Because you have all of this knowledge and power at your fingertips, then you could be the controller of your destiny, your business, or your credit, Watkins said. Dont wait, utilize it.
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How to avoid 'sharenting' and other paparazzi parenting habits
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A recent study revealed parents often spend up to two hours staging a single photo of his or her child to post online. - photo by Amy Iverson
Before having kids, some people just dont appreciate their friends baby posts. But after having a child of their own, three fourths of new parents jump right on the parental social media bandwagon. If you have become a member of this group, there are some rules to follow for posting responsibly.

Much of a parents worry is how to teach their children to use social media responsibly. We talk with our kids about privacy, oversharing, and setting restrictions on their devices to keep them safe. But parents themselves need to look in the digital mirror once in a while. Before having children, it doesnt take as much effort to think about what to post online. Its up to us to decide what we share about our own lives. But once you become a parent, there are many questions to think about regarding what is appropriate to post about your kids on social media.

In a recent survey, kids clothing subscription company Mac and Mia surveyed 2000 new parents to find out how they are documenting their kids lives on social media, and what concerns they may have.

First of all, people without children seem to feel a bit differently about the onslaught of baby pictures online than those who are parents. 18 percent of people say before they had kids, they were annoyed by their friends baby posts. But after having children of their own, 73 percent admit they post progress pictures of their little ones every single month.

Not only are new parents letting the world know each time their baby is a month older, but they are posting about their kids every few days or so. Men and women report they post 6-7 times per month about their baby.

And while 70 percent of new parents say the benefit of using social media is how easy it is to help family and friends feel involved, there are some downsides. Here are a few tips to avoid the pitfall of becoming paparazzi parents.

Dont miss the moment

In the Mac and Mia survey, some parents admitted to spending up to two hours to get the perfect shot of their baby. That seems a little extreme. New and old parents alike should be careful about spending so much time taking pictures and videos that they dont enjoy the moment. Years ago, I decided to never live an experience through my phone. A study by Linda Henkel, a psychology professor at Fairfield University in Connecticut, found that when people took pictures of objects in an art museum, they didnt remember the objects as well as if they simply observed them.

This photo-taking impairment effect can happen to parents as well. If we are so consumed by getting the perfect photo, we can miss out on the moment all together, and our memory of it will suffer.

Dont forget about privacy

60 percent of couples say they have discussed rules and boundaries for posting their babys photos, according to the Mac and Mia survey. Even so, men are 34 percent more likely to publish baby posts on public accounts. If parents are concerned about their childrens privacy, keeping photos off of public accounts is a given.

In the Washington Post, Stacey Steinberg, a legal skills professor at the University of Florida, and Bahareh Keith, a Portland pediatrician, wrote that sharing too much information about kids online puts them at risk. They write that all that sharenting can make it easier for data thieves to target out kids for identity theft. Check that your privacy settings are where they should be and never share identifying information like full names and birth dates.

Dont be paparazzi parents

36 percent of parents say they take issue when their childs photo is posted online by someone else. Responsible social media users will always ask permission before posting a photo of another child. But parents should also think about whether their own children will take issue with their own posted photos a few years down the road.

When parents are constantly snapping pictures and throwing them on social media, it can be easy to forget to pause and make sure the post is appropriate. I always use the billboard example with my kids. I ask them to picture whatever they are posting going up on a billboard in our neighborhood. If they are okay with that, then their post is probably fine. Parents should ask themselves this same question when posting about their children. But they should also ask themselves if their child would be OK with this post on a billboard in 15 years. If it would cause embarrassment or humiliation, it might be best to keep it private.

Once children reach an appropriate age, parents should include them in the process of deciding what pictures are OK to post. Researchers at the University of Michigan surveyed 10- to 17-year-olds and found children believe their parents should ask permission more than parents think they should. The kids in the survey said sharing happy family moments, or accomplishments in sports, school and hobbies is fine. But when the post is negative (like when a child is disciplined) or embarrassing (think naked baby pictures or messy hair), kids say to keep it off social media.
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