Checking your credit score can be one of the most important factors when it comes to handling your finances. Knowing your three numbers is key considering that they will determine whether you get approved for loans, mortgages, or lower interest rates.
Maintaining good credit health can also keep you financially responsible, help you budget your expenses, and create positive habits that will lead to increased savings.
Although there are many factors to consider when determining your actual score, there are just two primary models that lenders use to decide whether or not you are a decent credit risk.
Types of Credit Scoring Models
The credit scoring model was designed to take five different factors with each one carrying its own percentage weight, to determine a credit bracket for lenders to use. Although there are several models, the range of credit scores calculated is based on a different tier depending on the model used.
The two predominant scoring systems today are known as the FICO score and the VantageScore. Both models are relied upon heavily when issuing consumer credit, however FICO is the preferred method as they have been around longer.
Here’s a few key facts regarding the two:
- The FICO score was created by the Fair Isaac Corporation in 1989
- The model is credited with creating the lending industry standard that we use today.
- It’s the preferred model by more than 80% of lending institutions
- Currently have around 25 types of scores available for various uses
- The VantageScore is a compilation between the 3 credit bureaus created in 2006
- Consumers can acquire a score in less time than the FICO version
- Requires limited credit history to produce a lending score
- Widely used by Experian, TransUnion, and Equifax
There are also other variations of credit scoring systems, however they are typically a combination of factors used in single assessments by the credit bureaus for risk exposure.
Difference Between your Credit Score and your Credit Report
A credit report is a detailed workup of your entire credit history. It contains several elements that include your demographic information (name, address, employers, phone number), collection activity, lender information, and credit accounts (payment history, type of account, credit limits).
The report also provides a full list of all of your lending activity to give lenders an extensive view of how you handle repayment of debts or loans, especially those with riskier balances like mortgages or student loan debt.
While a credit score does take into account all of the reported information, it mainly exists to take a snapshot of your ability to responsibly handle credit on a numerical scale.
All three credit reports with three accompanying scores should be considered in order to have an accurate picture of your credit health.
How to Check your Credit Score
Checking your credit score can be done in a variety of ways and often only require you to enter a small amount of identifying information such as your name, social security number, recent address, and verify an prior or current credit identifier.
Many credit services, card companies, and lenders offer ways to check your credit score, often for a small fee or in some cases free as a part of doing business with them.
The resources below are some of the ways that you can get your hands or your own score:
Free Credit Scoring Website – You can get a free copy of your credit report or scores at websites such as Annual Credit Report, Credit Karma, Credit Sesame, or Freecreditscore.com. There are no fees required and the registration process is typically hassle free.
Your Credit Card Provider – These days your credit card provider or issuer will provide you with a free credit score as a partnership with one of the credit bureaus. If you have an account with Capital One, Discover, Citi, or Bank of America, you are likely already enjoying this benefit.
Nonprofit Credit Counselor – There are many non-profit credit counseling organizations that offer credit management and financial services. Companies like the National Foundation for Credit Counseling also offer free copies of your credit reports or scores.
Credit Bureaus – There are three credit bureaus that keep tabs on your creditworthiness and report that information to possible lenders, known as TransUnion, Equifax, and Experian. Once you sign up for their services, you can also receive an individual credit score from each one.
MyFICO – MyFICO is a credit scoring model that allows you to receive various types of credit scores. You can choose from over twenty five different ones, but the most recent one is the FICO9.
How are Credit Scores Calculated?
Credit scores are calculated using a highly complex algorithm that takes into account five main scoring factors based off of your credit behaviors. Each model uses a variation of the following metrics to generate your individualized score.
- Payment history – Thirty five percent of your score accounts for how well you’ve made payments on time.
- Amount owed – Thirty percent is based on your debt to income ratio of amounts owed versus total credit limits.
- Credit history length – Fifteen percent of your score is calculated by how long your credit profile is.
- Credit types (mixes) – Ten percent is based on the mixture of the types of credit that you have.
- New credit accounts – Ten percent is given to how often you open new credit accounts
- Payment history – The most influential factor of calculating your score
- Credit mixes/Credit length – The second and third highest factors used to determine your score
- Amounts owed – Hold a moderate influence in determining your credit risk
- Available credit/Inquiries – The least weighted factor in calculating your credit score
What Does a Credit Score Mean?
A credit score is an overall assessment of how well you are able to handle financial transactions in cases where the funds are lent to you.
A good score shows that you have a decent payment history, cautious spending habits, and aren’t overly zealous with acquiring accounts.
On the other hand, a bad or poor score makes you a much higher risk and tells lenders that you are likely to default based on poor habits.
Does Checking Your Credit Score Lower it?
Contrary to what many people may believe, the act of checking your credit score does not lower it. However, multiple references based on credit applications in a short time span can create inquiries which will affect your score over a certain period of time.
A good tip to remember when submitting credit applications for important expenditures such as personal loans, loan refinancing, car loans, or credit cards, is to ensure that they are done within a certain window where the bureaus will count them as a single inquiry as opposed to many.
Your credit score is one of the most important factors to consider when making your financial goals. Those three numbers can determine the quality of lifestyle that you live. Monitoring your credit score on a regular basis can keep you on the path to financial success.