Your Credit Score
What is your credit score? Don't know? You should. If you aren't aware of what your credit score is, how do you know how creditworthy you are? You may think you have an idea, but you really don't unless you understand what a credit score is and how it is calculated. This article will explain what a credit score is, what it does for you, and how you can find out what it is.
What is a FICO Credit Score?
A credit score is a three digit number that implies how creditworthy you are and how likely it is that you will repay any loan that you receive. The number is based on a statistical analysis of a person's credit files. If you have read the articles "Obtaining Credit" and "Using Credit Wisely", you will have already learned a lot about credit and how your credit standing is affected by how well you manage your finances, specifically the use and repayment of credit cards, the acquiring and repayment of loans, and the wise (or unwise) decisions you make in handling the responsibility of loans and credit cards.
In most cases, when people talk about credit scores, they are referring to FICO credit scores. What is FICO? It is actually an acronym for Fair Isaac Corporation, the company that developed the system to calculate credit scores. Unfortunately, when you reference a FICO score, you could actually be referencing three different scores. That is because the three credit bureaus (Experian, Equifax, and TransUnion) that lenders use to get your credit score and credit report use the FICO calculation a little differently.
Why would the credit bureaus use the calculation differently? Well, to keep the answer to that question is simple, it is because each bureau values certain information differently. For example, there may be a bit of information that Equifax and Experian use to calculate your score that TransUnion doesn't use. If everything else in the calculation except that one piece of information was the same, your TransUnion score could (or could not) be higher than the other two.
It is also important to know that each credit bureau refers to the score by a different name. It is good to know what those scores are so that you can identify which credit bureau score you are looking at. Experian calls theirs the Experian/Fair Isaac Score. Equifax calls theirs the Beacon Score. TransUnion calls theirs the Empirica Score.
One thing that remains constant between all three bureaus is the scoring range. FICO credit scores range from a low of 300 to a high or 850. Because they rate credit information differently, you will most likely have three different scores within this range. For example, Experian could give you a score of 792, Equifax could give you a score of 796, and TransUnion could give you a score of 827. Like was said before, since each bureau use information differently to calculate the score, this could be a common situation.
So when you have three different scores, which one gets used? Well that will depend on the lender. Generally mortgage lenders will use the middle of the three scores. Some financial institutions may decide that they want to use only the TransUnion score. Because of this, you don't want to worry about one particular score. What you do want to do is make sure that your credit is good enough to have all three scores be within the same range on the score chart.
The score chart will break down scores into ranges that indicate credit risk. Generally any score above 730 is considered excellent. However, the closer you get to 850, the better your interest rates will be. A score of 700-729 is considered good. Scores of 670-699 need a closer review. Scores of 585-669 are a higher risk. Scores below 585 will cause you to have a limited credit history. If your score is lower than 585, you will have a hard time getting loans, credit cards, or good interest rates when you do get those.
For consumers with poor credit that are working to improve it, there are the Alternative scores. The Alternative scores are based on your bill paying history, outstanding loan balance, types of credit accounts, etc.
What is a Vantage Credit Score?
The Vantage Credit Score is another score that could be used by lenders that are trying to help borrowers qualify for loans. It accomplishes this goal because the score rating scale is higher and the data used to calculate the score is more consistent between the three credit bureaus.
Developed in 2006 with the intent of scoring consumers more consistently, it has been advertised by the three credit bureaus as something that will help banks and lenders further drill down into the "subprime" categories. Subprime lenders are those banks and financial institutions dedicated to borrowers with less than perfect credit or harder to substantiate credit. This means that a borrower with a FICO score lower than 585, who probably wouldn't get a mortgage loan, may get one from a subprime lender using the Vantage score of 800.
Why is there such a difference in the scores? First of all because the formula used by all three bureaus is the same. This means that the same information used for a FICO score can be used, but because the weighted value of that information is different with the Vantage score, credit history can look more acceptable to a lender.
To better explain, if you have bad credit but are working to improve it, a Vantage score will reflect the effort better than a FICO score. That is because the factor that weighs heaviest on the Vantage score is your payment history. Almost 1/3 of the Vantage score is based on this. But FICO looks at this too (35% of the FICO score is based on this), so if you have been diligent in paying off your debts on time, never missing or being late with a payment, your score with Vantage still may not be better FICO. But, Vantage also looks at your debt to balance ratio, something that FICO doesn't look at. The less you owe of what is available to you, the better the score will be. The other big difference is that FICO weighs heavily (30% of the score) on the amount of debt you owe. Vantage only factors this as 15% of the score which could make a huge difference.
The Vantage score range is from 501 to 990. It is broken down at each like grades in school. 900-990 is an A, 800-899 is a B, 700-799 is a C, 600-699 is a D, and 501-599 is an F. But because of the formulas being different, a Vantage score of 900 isn't necessarily better than a FICO score of 700. For this reason, you need to know what all your scores are and which score the lender is using to consider you for a loan.
What a Credit Score Does for You
When you walk into a bank and ask for a loan, you may think that putting on the best appearance possible will help. After all, the more professional looking you are, the more you will appear to be a successful, trusting person that manages money well and meets their obligations. Guess what, you could go in cutoff jeans and a tank-top with sandals and bed-messy hair. It doesn't matter. The person in the custom tailored Ralph Lauren suit could have a FICO score of 620 while the person in the cut-offs and tank-top could have a FICO score of 820. Guess who is most likely to get the loan?
That is the harsh reality of your credit score. It will govern your ability to get financing when you need it. Even someone in a position of power (possibly the city mayor) or someone who is popular in the public eye (a movie star, for example) can't rely on their social standing to help them. Your credit history speaks volumes about the financial trustworthiness that you hold. If you have been delinquent in the past, you will have a harder time convincing the lender that you will pay them back on time.
Another harsh reality is that the effect of a credit score goes beyond the ability to get a loan. Did you know you may not be able to get a job because of a low credit score? Some positions of employment will heavily depend on a person's credit score if there is a level of financial responsibility associated with the job duties. Would you hire someone to be an accountant for your company when they can't properly manage their personal finances?
Then there is housing, utilities, and even insurance. Did you know that these can be affected by your credit score? Obviously you won't be able to get a mortgage loan with bad credit, but you may not be able to rent a house or apartment either. More often these days a person's credit is portraying them as a risk when it comes to any financial transaction.
Landlords, insurance agencies, and utility companies may not want you as a customer if your credit history shows information that is not desirable such as periods of unemployment or multiple instances of late and/or missed payments. They may require deposits, additional months payments (first and last), or some other amount as a security to draw upon should you become delinquent in your payments or default altogether. Insurance companies may charge you a higher premium for insurance thinking that your life in general is more risky and that your credit score is just one example show that it is.
So now you know what a credit score does for you, right? Actually, it does a lot more than what has been mentioned. Think of it. All of these things are negative results from having poor credit scores and negative credit history. For all of these negative results, there are positive ones as well. To get those positive results you just have to improve your credit history and score. The better the credit score, the more credit you will have made available to you. It will be easier to get loans and the interest rates will be better. It will be easier to purchase a house or car (just wait and see how well the dealership treats you when they find out you have a score of 800 or more…). You see, not only is it better to have a high credit score it is in your best interest to work on getting and maintaining one.
How Can I Get My Credit Score?
Does all of this information make you want to quickly get your credit history report and find out what your credit score is? It should. What if there is a blemish that needs to be taken care of? You won't be able to take care of it unless you know it exists. So go get it. What, you don't know how? Keep reading.
The three credit bureau companies are "for profit" companies. They don't just give away credit information. However, because of the Fair Credit Reporting Act, you are able to get a free copy of your credit report once every twelve months from each credit bureau. To get the report you can contact each credit bureau separately on their websites or via telephone. However, you also have the option to go to www.annualcreditreport.com and request a copy of the report from all three at one time. You can also use the toll free number for that website (877-322-8228).
When you get your credit reports from each bureau, you will see that there is a lot of information that is the same, yet there is also some information that is different. This will allow you to visualize why scores would be different from each bureau. Unfortunately you won't see the scores.
Credit scores are not given out free with the credit report. You have to pay a fee to get the scores. You will find websites that offer a free credit report and free credit score, but the score will only be free for the first time. Unfortunately, you could pay for your score and then end up doing something the next day that will change the score.
Should this and the fact that you have to pay for the score detract you from getting it? It shouldn't. You don't need to continue to request the score each month to see what changes are taking place. Not only is it not necessary, it isn't recommended. Your score won't change very much or very often unless you are being reckless with your credit and your debt responsibilities. If you are being responsible in paying your debts and using your credit, your score most likely won't change much if it does.
The most important thing that you can do is get your credit report, review it for errors or possible fraud cases, and be responsible with the credit that you do have. If there are no errors or cases of fraud, and if you are being financially responsible, your annual review of the credit report will give you an idea of what has happened to your credit score. If you notice something that is wrong or concerning on your report, contact the credit bureaus to get it corrected. Your financial security is your responsibility. Be proactive in making it beneficial to you.
Disclaimer: Information found within this page are for informational purpose and does not represent bank practice or services offered at its entirety.