Credit Score 101
Credit score issues have received just as much media attention as credit report issues these days — and for good reason. Your credit score and credit report are a lot like peas and carrots. While they're separate, distinct pieces of your credit identity, they go together (just like peas and carrots) to form your credit history.
If you haven't read Credit Report 101 yet, we suggest you do that first. It'll lay the foundation for understanding your credit score so that you can get a solid idea of how your credit history looks to the likes of lenders, landlords and employers.
Your Credit Score Is…
Your credit score is a numeric assessment of your creditworthiness and is used by lenders when deciding whether or not they'll give you a loan or extend you a line of credit. And that's just the beginning. Your credit score can affect your loan amount or line of credit, the terms of your loan and your interest rate. Think of your credit score as a report card for your credit history.
Where Your Credit Score Comes From…
There are a variety of sources for credit scores. Each of the three credit reporting bureaus uses proprietary mathematical models to determine your credit score. What does that mean to you? It means your credit score from each of the credit reporting bureaus (TransUnion, Experian and Equifax) will vary, sometimes drastically.
The majority of lenders use a completely different score report — your FICO® credit score — to determine your creditworthiness. FICO® credit scores are the most popular and widely accepted credit score report in the United States.
There is a company called myFICO, that maintains FICO scores and pulls information from each of the credit reporting bureaus to create three FICO scores for you — so you have a TransUnion FICO credit score, an Experian FICO credit score and an Equifax FICO credit score.
Understanding Your Credit Score…
Credit scores from the different sources vary, but generally they range from about 350 to 850 points. The higher your credit score, the better your overall credit rating. A high credit score with a corresponding high credit rating means that you are generally considered to be a good credit risk. Most credit scores range from
600 to 750.
Another point of interest: since your credit information with all three credit reporting bureaus can vary, your credit score can vary by up to 50 points as well.
How Your Credit Score Is Determined
As we mentioned earlier, each credit reporting bureau uses unique mathematical formulas to weigh specific credit factors. Below are some of the most common factors used in the calculation of your credit score.
- Credit History — Long, healthy credit histories are generally viewed favorably.
- Payment History — Records of late payments on your credit report will negatively impact your credit score.
- Outstanding Credit — Your creditworthiness can be diminished if you already owe a significant amount of money to other institutions.
- Existing Accounts — Having too many open accounts can hurt your credit score, even if you aren't actively using them, because it is viewed as credit that's available for your use.
- New Accounts — Potential lenders usually view new account activity with caution.
- Inquiries — A lot of recent activity on your credit report can lower your credit score.
Now do you see the relationship between your credit score and your credit report? Mind your peas and carrots — activity on your credit report can have a significant impact on your credit score!