The Ins and Outs of Your Credit Score

The Ins and Outs of Your Credit Score

While many lenders and businesses will tell you that you are more than your credit score, the truth is that your credit score matters more than you probably realize. The better you understand your credit score and what affects your score, the better control you can have over your financial future.

Types of Credit Scores

There are two types of credit scores that most people are aware of. However, there are actually many more. The most prominent, two, however, are:

  • FICO
  • VantageScore

The "FICO" score was developed originally by Fair, Isaac and Company, now better known as FICO. Businesses use these scores when making credit decisions. The FICO score can be adapted to meet unique or specific needs based on industry or even types of loans.

VantageScore was created as an alternative to FICO by the big three in the business and

  • Experian
  • TransUnion
  • Equifax

It was launched in 2006 and has since remained a force in the industry.

Additionally, alternative credit score models and individualized models are used in-house by large corporations. They often factor traditional credit scores into their risk assessments.

Understanding Credit Scores

Suppose you are preparing for a major credit purchase, such as a car or a home. In that case, it is a good idea to get a copy of your credit report to make sure the information is accurate and up-to-date.

It's also a good idea to know where you stand, credit-wise, before applying for any loans. Fortunately, you can obtain a copy of your credit report from any of the three major vendors one time each year. You can also get your credit report free from annualcreditreport.com, which Federal law authorizes.

You can receive more than one if you are willing to pay for subsequent copies. One good way to keep a running check of your credit report throughout the year is to get one copy from one of the three major organizations per quarter. That way, you never have to pay, and you have a good idea of your credit picture.

So, what does your credit score say about your credit situation?

For the average person, it does not say much. However, to lending organizations, it can reveal a lot. The information that is of particular interest to these groups include:

  • Payment history. They want to see that you have a history of on-time payments.
  • Account age. The longer you have credit accounts, the better. It is in your best interests to maintain old accounts rather than closing them for this reason.
  • Credit utilization. This score represents the amount of credit you are using compared to the amount of credit available to you. The lower your credit utilization score is, the better. Ideally, you want your credit utilization to be less than 30 percent of your available credit.

The information in your credit report, combined with your credit score, helps lenders determine whether to extend credit to you.

What Affects Your Credit Score?

Credit scores can be affected by a wide range of everyday events, including some things that may surprise you. For instance, applying for credit can harm your credit score.

It's true!

This is especially the case if you go and suddenly apply for many types of credit (credit cards, auto loans, mortgages, etc.) at the same time. Lenders would rather see fewer credit applications and long-term relationships with the creditors you do have. The things that affect your credit score most include:

  • Late payments
  • Excessive debt (high debt-to-income ratio)
  • Credit utilization (30 percent or more)
  • Default history
  • Too many credit inquiries
  • All new credit

Solve these problems on your credit history to enjoy faster approvals, more approvals, and lower interest rates.

Key Takeaways

  • There are two major types of credit scores.
  • Both scoring processes use the same basic information to assign scores.
  • Total debt, credit utilization, account history, and payment history all have strong impacts on your credit score.