Understand and Check Your 3 Credit Scores
Despite their importance, credit scores remain shrouded in mystery for many people. Here's a primer to help you "know the score" when it comes to the most important three numbers in your life.
It's a fact: no numbers go farther in determining your quality of life and the direction of your future than your 3 credit scores. Depending on how high or low they are, your credit scores can make or your break your ability to secure loans, insurance, and even employment. Most people are aware of the significance of credit scores. But few people know the What, Why, Who, Where, and How that provide a fuller perspective on their credit scores and the ways these key digits impact their lives. Credit knowledge is credit power: the more you know about your credit scores, the better able you'll be to get the most out of them.
What factors are used to calculate your 3 credit scores?
Your credit score affects so many aspects of your life, it's critical that you know what factors are used to calculate them. Once a carefully guarded secret, credit score calculations were under the full control of the credit reporting bureaus, which saw no reason to share this information because doing so would yield them no financial reward. But the state of California compelled the bureaus to reveal credit scores and reports to consumers, and led the way for the federal government to make this information available to every American.
As a result, you now have the right to view your 3 credit scores. But by understanding the criteria that the credit reporting agencies use to calculate these numbers, you will be better equipped to make the most of your credit score.
The following is a rundown of the factors and percentages that comprise your credit scores:
- Amounts of money owed: 30%
By comparing the amount of debt you owe to your amount of available credit, lenders and credit bureaus determine your debt-to-credit ratio, which must be low to benefit your credit score.
- Length of credit history: 15%
How long you've been using credit lines, when you opened an account, what kind of account it is, and the amount of activity on your accounts all have a bearing on your credit score calculation.
- New lines of credit: 10%
To prevent your credit score from dropping, avoid opening new lines of credit in a short time period, which lenders and credit bureaus can interpret as financial desperation.
- Types of credit used: 10%
How many forms of credit you currently use and have used in the past (credit cards, mortgage, car loan, retail accounts, etc.) are used by credit bureaus to calculate this percentage.
Though there are marginal differences in their approaches, the top three credit bureaus - TransUnion, Equifax and Experian â€” apply these factors to calculate your credit scores. Equipped with this knowledge, you can avoid confusion and clear your path to the best possible credit scores.
Why does each bureau have its own credit score?
In the wake of the California legislation passed in 1999 that required the "Big 3" credit bureaus to make credit scores available to consumers, Americans became more aware of the impact that these bureaus can have on their finances. And yet for many people, why each bureau has its own credit score remains an unanswered question. Here are a few key reasons why your score can vary from bureau to bureau:
- Each credit bureau's files contains different data
Your credit report goes back seven years (if you declare bankruptcy, for example, it remains on your credit report for 10 years), and varying information at the credit bureaus can positively or negatively affect your credit score. If one of them has data that the others don't (say a missed car payment), your credit score is likely to vary.
- Your credit report is marred by errors
Automated information is convenient and common. It's also imperfect. By swiping your credit card at a department store, you are electronically transmitting information. As information gets transferred from machine to machine, errors can and do happen. It is critical to check your credit report often for discrepancies and use a credit monitoring service to alert you to errors that could drag down your credit scores.
- Gaps in information from lenders
Always bear in mind that some merchants and lenders provide certain information to one bureau and other data to another. Differing or conflicting data is another factor in why your credit score varies from one credit bureau to the next.
- Inconsistent use of your name
If your name is not spelled exactly the same on all of your credit cards, utility bills, mortgage, auto loans and other invoices, variations on your name can lead to variations in your credit scores. What's worse, it can result in your credit report being marred by someone else's reckless use of credit.
The above should give you insight into the disparities between your credit scores at the different credit bureaus. Moral of the story: check each credit report carefully for errors. If you find any discrepancy, immediately contest it with the appropriate bureau. It is always wise to obtain your latest credit reports and scores before applying for a loan. By staying informed and up to date on your credit status, you can spare yourself headaches and be better equipped to negotiate the best rates. Knowing "why" your credit scores vary can help ensure you never say, "Why me?" when you apply for a loan.
Who wants to know your 3 credit scores?
There was a time when the sole purpose of credit scores was to help banks evaluate the credit worthiness of loan applicants. If you weren't looking for a loan, it didn't matter if your credit rating was high or low. But nowadays even companies that don't issue loans check your credit score to gain insight into your character and judgment.
It is common knowledge that a poor credit rating can make it problematic to secure a low-interest mortgage. But many people are surprised to discover that their credit scores can determine how much their car insurance premiums cost or if they qualify for auto insurance at all. Or that just one low credit score can mean higher phone rates or being rejected for homeowner's insurance.
Who wants to know your credit scores goes far beyond banks and lending institutions. The answer to this "who?" may be surprising.
Landlords and condo associations
Just as apartment hunters look for the best rentals, landlords look for the best renters. Credit scores provide a window through which landlords can get a glimpse at how responsible a prospective tenant is. A history of on-time repayment of loans and other debts is a good indication that the rent will also be paid on schedule. As a result, many condo associations and property management companies require a credit report and score before they will sign a contract with a renter.
"We have to check your credit score before we can hire you"
More and more employers check credit scores on the basis that a good credit history signals that the job applicant will be a responsible employee. In addition, it usually cost less for an employer to pull a credit history than conduct a traditional background check. While potential employers can't obtain your credit scores without your permission, it's probably a good idea to be prepared if they ask for your consent. Refusing could send the wrong message.
Poor credit rating equals higher insurance premiums
When you apply for car or homeowner's insurance, you can expect to have your credit scores checked. Insurance companies use credit scores to gauge what kind of insurance risk you pose. The better your credit scores, the better your insurance rates and coverage. On the other hand, the lower your credit scores, the higher your premiums are likely to be.
As healthcare costs rise, health insurance companies are checking credit scores in addition to medical histories. As a result, the health of your credit scores may affect the cost and quality of your health care.
Are they really authorized to check your 3 credit scores?
According to The Fair Credit Reporting Act (FCRA), employers, insurers, and landlords are all legally entitled to request your credit scores. That said, you generally have the right to refuse a request for a credit check. Keep in mind, however, that by refusing a credit check you may give the impression that you have something to hide. Arousing suspicion of poor credit could jeopardize your chances for the job, insurance, or rental apartment you're applying for.
By remaining in the dark about your credit history, you run the risk of unpleasant surprises. To know where you stand, it's vital to monitor your credit report and score. Financial advisors typically recommend that you check your credit score at each of the three credit bureaus prior to applying for a loan, insurance, or employment.
Where do your 3 credit scores fall in the FICO® score range?
Given the fact that credit scores have such an impact on the lives of consumers, it's no surprise that many people are curious about their standing in the credit score range used to measure their credit worthiness.
The FICO® score, or the Fair Isaac credit rating system, was created by the credit sector to determine each consumer's credit risk level. While FICO® has copyrighted its exact figures and chooses not to share them, its credit score ranges tend to run between the low 300s and the mid-800s. How often a credit evaluator might see higher-end scores and whether it's possible to get a "perfect score" is a subject of debate. On the lower end of the spectrum, 300 is generally considered the bottom of the credit score barrel.
Where you fall in the credit score range is key to how credit evaluators view your credit risk. Let's say your credit score is 750: that's considered fairly high, but there's room for improvement. On the other hand, if your credit score is under 620, a lender could consider you high risk and be reluctant to extend credit to you. If your credit score falls farther down the scale, the culprit may be delinquencies like unpaid bills or late loan payments.
Before you can elevate your credit scores into the upper range, you need to resolve any blots on your record and establish a good credit history to reassert your credit worthiness. By checking your credit scores now and utilizing the information we've just provided, you'll not only be able to see where you fall within the credit score range; you'll also know where you need to make adjustments to get it within the range you want.
How can your 3 credit scores get damaged?
Even if you know your credit score, you may still be unaware of the factors that can damage it. The last thing you want to do is to fall into the most common credit traps - mistakes that can be prevented, but can be difficult to correct once you've made them. Knowing what mistakes to avoid is your first line of defense when it comes to protecting your credit scores.
Factors that can damage your credit scores include:
- Maxed-out credit cards
Hitting your credit card limit sends a clear message to the credit bureaus and lenders that you've dug yourself a financial hole and that your trustworthiness is questionable. The impression you're giving is that you're at high risk of defaulting on loans - and your credit score suffers as a result.
- Bad debt-to-credit ratio
Do you have more debt than available credit? If you do, it's a mark against you that casts you as high risk and lowers your credit score. The more available credit you use or the greater your debt, the harder the hit to your credit score. To protect your credit score, the ratio on each line of credit should be at 50 percent or less.
- Home foreclosures
An all-too-common red flag to creditors in a shaky real estate market, having a home foreclosed means that for whatever reason, the owner was incapable of making the necessary payments. If you have a mortgage, you need to make sure you maintain a history of timely payments on what is likely to be your biggest loan.
- Paying late
Every time you miss a deadline for a payment you damage your credit score. Consider that 35 percent of the credit bureaus calculation of your credit scores is based on when you pay your bills represents 35 percent. That makes it the largest factor. The good news is, establishing a pattern of paying your bills when they're supposed to be paid can have a very positive effect on your credit scores.
- Failure to pay your bills
Not paying your bills can prove very costly with your credit score. In fact, undoing the damage of blowing off a bill could take years. Paying your bills in full and on time helps keep lenders happy, creditors off your back, and your credit scores high.
- Collection notices
As a last-ditch effort to collect on an overdue bill, these notices constitute a legal action by a collection agency to get at least a percentage back on the amount owed. Often viewed as a strong-arm tactic, a collection notice can take a serious toll on your credit score.
Because they demonstrate a chronic inability to manage a financially devastating amount of debt, bankruptcies can tank anyone's credit scores. In fact, bankruptcy is a huge blot that stays on a credit report for ten years, during which time it can make you persona non grata to credit issuers.
- Closing old accounts
Think it's a good idea to close the account of an old retail or bank credit card? Think again: You may not use that card anymore, but if it's still a form of available credit, it can help your debt-to-credit ratio, which in turns helps your credit score. It's great to know your credit scores, but it's also critical to know what works for and against them, so you can manage your credit better. By avoiding these and other factors that damage your credit scores, you can get the most out of your credit and save money in the process.
Stay Informed, Know Your 3 Credit Scores
Remember the What, Why, Who, Where, and How of credit scores and you'll be able to make more informed decisions on how to use your credit to your greatest advantage. Remember also that a critical component of smart credit management is to view your credit scores on a regular basis and make sure your credit is being monitored at all three major credit bureaus.
What Does It Mean To Have 3 Credit Scores?
People often wonder what it means to have three credit scores. FreeScore's renowned credit expert provides answers.
Watch the video to hear Carrie Coghill, our Director of Consumer Education, discuss the differences between the top three credit bureaus and the scores they provide. You'll gain valuable insight into why it's important to know all three of your credit scores and how they can vary.