It is no secret that many people struggle to obtain and keep a good credit score. Credit scoring is not something we learn in school, so we must rely on our parents to teach us. Unfortunately, our parents may have lacked the knowledge themselves, so they couldn’t pass it on. As a result, we may end up ruining our credit before it really gets started. Understanding how credit scores work is the first step to getting and keeping a good credit rating. Armed with this information, we can improve our own credit scores and help our children avoid the pitfalls of bad credit.
What is a Credit Score?
Simply put, a credit score is a number given to you based on information in your credit file. The credit score tells creditors how reliable you are in paying your bills. Credit scores are different depending on what “formula” or model the creditor is using.
What Makes Up Your Score?
The three major credit bureaus are Equifax, Transunion, and Experian. Each time you use credit, information about your credit activity is given to these credit bureaus and housed in your credit report.
Credit, in simple terms, is borrowed money. While your cable, water, or gas company may use your credit score to determine whether you need a down payment to get their services, these monthly bills do not get reported to the credit bureaus. Creditors are less concerned with how you handle monthly necessities, which you will often pay with cash, but instead, are more concerned with whether or not you can be relied upon to pay back money that is lent to you.
However, if you default on a monthly obligation or medical bill, and a collection agency has to come after you for that debt, they will report THAT activity to the credit bureaus.
The credit scoring models or formulas look at the following information on your credit file to calculate your score:
- Your Payment History. Do you pay your bills on time? This has the most impact on your credit score.
- How much do you owe? The amount of debt you carry has a significant effect on your score.
- Length of credit history. Yes, older people have an advantage here, while less impactful than the other two, longer credit histories will positively impact your credit score.
- Credit Mix. Your mix of credit affects your score. More variety is good.
- New Credit. Opening new credit usually has a small negative impact on your credit score.
Which Score is the Correct One?
The most widely used scoring model is the FICO score.
The three credit bureaus created the VantageScore in 2006. While this score has gained popularity, it is still not as widely used as the FICO score. Therefore, if you want to get approved for credit, you should know your FICO Score.
The earlier versions of the VantageScore used a different scoring range than the FICO score, but now, they are similar; therefore, it may be hard to tell which one you are getting.
You should obtain your credit score directly from the source to avoid confusion.
MyFico.com is the best place to obtain your FICO score. There is a fee for this service.
The VantageScore is available through several credit card companies for free. You can view the official VantageScore provider list here.
If you don’t want to pay for your scores, and your credit isn’t good enough to get a credit card that will give you the scores for free, you can always obtain a free copy of your credit report. Although your credit report won’t contain your score, it will show you the information that is being used to calculate it. You can then focus on fixing the things that may be hurting your score.
AnnualCreditReport.com is the only “official” place to obtain your credit reports.
