A credit score is a numerical representation of your creditworthiness. Your score, which is primarily based on your history of managing and repaying loans and credit cards, can help creditors determine if you’ll qualify for a new account and what terms to offer you.
People with a higher credit score may be able to qualify for a wider range of financial products and get the best rates and terms. Lower scores can make it difficult to qualify for a loan or credit card, and can lead to paying extra fees and more in interest.
Your credit scores can also impact other aspects of your life.
Credit scores may influence your insurance rates, ability to rent an apartment, and whether you qualify for a new mobile phone plan. People with a low score may also need to pay a security deposit to set up a utility, phone, or internet account.
Unfortunately, there are a lot of misconceptions about credit scores. We want to clear these up as we explain what credit scores are and how they work.
There are many credit scores
One misconception about credit scores is that there is only one credit score.
FICO®, or Fair Isaac Corporation, was one of the first companies to create credit scores based on a consumer’s credit report. The base FICO score, which ranges from 300 to 850, became synonymous with a credit score.
However, a credit score is simply what a computer program (also known as a model) spits out after analyzing one of your credit reports, and there are many different credit scoring models.
For example, FICO has industry-specific credit scoring models for card issuers and auto loan lenders that range from 250 to 900. Additionally, FICO periodically updates its base and industry-specific scoring models, so there are different versions of each model.
VantageScore®, another credit scoring company, also creates and updates a scoring model that it developed. Although FICO scores are more widely used in lending decisions than VantageScore scores, the two companies are the main competitors in the U.S. credit scoring industry.
One company’s scores aren’t necessarily “better” or more “real” than the other. They represent different approaches to solving the same problem — determining the likelihood that someone will be 90 or more days late paying a bill.
While some mortgage lenders are required to use specific FICO scoring models, for the most part, it’s up to the creditor to decide which score it wants to use. To make matters even more confusing, many large creditors create custom credit scoring models. As a result, a creditor might use a custom score, a FICO or VantageScore credit score, or a combination of custom and generic scores when making a lending decision.
How are credit scores calculated?
The good news — you generally don’t need to overthink the various credit scoring models.
VantageScore scores and most FICO credit scores depend entirely on the information in one of your credit reports from Experian, Equifax, or TransUnion. Your score can vary depending on which model is used, and which credit report the model analyzes. However, many scoring models use similar factors to determine your score:
- Payment history. Your history of paying bills on time is one of the most important scoring factors. Having multiple accounts with long histories of on-time payments is best for your score, while late payments, collection accounts, or a bankruptcy on your credit report could hurt your score.
- Your current credit use. The amount of outstanding debt you have and the percentage of available credit on revolving accounts (e.g., credit cards and credit lines) that you’re using is also important. The percentage you’re using is also known as your utilization rate and having a low utilization rate is generally best for your credit scores. On the other hand, maxing out credit cards could lead to lower scores.
- Your history with credit accounts. Having a long credit history can be good for your scores. The scoring models may consider your overall average age of accounts, how old your oldest account is, the age of your newest accounts, and other account-age-related factors.
- The types of credit accounts you’ve had. Having a mix of revolving and installment accounts can help your credit scores as it shows you have experience managing different types of credit. For industry-specific scores, such as an auto lending score, your history with that specific type of account could be especially important.
- Recent credit. Applying for new accounts, even if you don’t get approved, could negatively impact your credit scores. When creditors review your credit report to make a lending decision, a record of the review — called a hard inquiry – gets added to your credit report. Having a lot of recent hard inquiries, particularly if you’re new to credit, could lead to lower scores. However, scoring models also let you shop around and may ignore hard inquiries that occur within a 14- to 45-day window (depending on the model).
Because many models use similar scoring factors, taking actions that lead to one of your credit scores rising could help all of your credit scores. Therefore, you may want to focus on the underlying information in your credit reports rather than if one score is a few points higher or lower than another score.
Want a better credit score? Focus on your credit reports
The three major credit bureaus — Equifax, Experian, and TransUnion – collect, organize, and sell consumers’ credit information. While the companies often get grouped together, they are for-profit competitors that only share limited information with one another.
Many large creditors will report your information to all three credit bureaus and your three credit reports may be similar, but it isn’t uncommon for there to be differences. As a result, if the same credit scoring model analyzes your three credit reports it may wind up giving you different scores based on each one.
There could also be errors on your credit reports that are impacting your credit scores. Closely reviewing your reports for incorrect information, and filing a dispute to get it corrected, could help you get the credit you deserve.
If you’re looking for assistance making sure your credit reports are correct, CreditDash lets you upload copies of your credit reports, automatically identifies potentially inaccurate information, and helps you create and mail dispute letters.