Understanding My Credit Score

Credit scores are a “grade mark” for how people behave financially. Your credit score estimates the risk of lending you money, and determines the terms for your mortgage, car loan, credit cards, insurance and more. If you have a low credit score, you may expect higher interest rates and lesser terms.

To be more specific, credit scores try to predict the likelihood that a person will make payments on time in the next 2-3 years.

A good credit score can save you thousands of dollars, and even hundreds of thousands on your mortgage alone! See this interest example table.

Credit Scores are mathematical formulas that evaluate many types of information on a person’s credit report. The output is a single number in the range of 300 – 850 (in case of FICO) that represents the risk of lending you money, and offers creditors a quick way to asses your applications for new credit.

There are many credit scores. Fico Credit Score dominates the market. Over 90% of all creditors use it to make their landing decisions. It has many different versions. Another name you may have heard is Vantage Score, but currently almost no one uses it.

Understanding My Credit Score
There are 3 major credit bureaus: Equifax, Experian and TransUnion. Each collects, stores and sells financial information about your credit history & current financial status. All that information is compiled into your personal credit report, which is fed into the credit score formula to yield a single number – Your Credit Score. This suggests that you actually have 3 different credit scores – one from each credit bureau!

Because each credit bureau keeps its own database and do not share information with the other two, there are quite a few variations between the different credit reports from each bureau. As a result, your credit score from each bureau would be different!

Example 1: You have a store credit card that reports only to TransUnion & Experian, but not to Equifax. Your Equifax report will not show any information about that card, whether positive or negative.

Example 2: Your auto dealer pulls your credit score from Equifax. While your Equifax report will show a hard inquiry, your Experian & the TransUnion won’t.

What goes into your credit score?
There are many different credit scores. Each uses different formula and gives different weights to each factor. All credit scores consider the following factors:

• Payment history – A record of how you repay your debts.
• Outstanding debt – Your balance-to-limit credit ratio.
• Credit account history – History and current standing of all your accounts.
• Recent inquiries – How often you apply for new credit.
• Derogatory credit information – Any negative information indicating failure to repay debts.
• Types of credit – A summery of all types of credit you have.

Fico Score Range
Fico ranges from 300 to 850, which further divides to 6 different credit ranges:

Understanding My Credit Score – A deeper look
 
As to further complicate things, Fico Score has several versions, each especially suited for a different purpose with different weights.

Mortgage lenders use a version called “Factual”. Car dealers use the “auto Enhanced” version, and there is also the “Standard” version.

So now, even if a mortgage broker and an auto dealer would check your score at the same bureau at the same time – each will get a different Fico score.

Here are some more invaluable credit score topics:
What Are Credit Scores – A comprehensive guide on credit score ratings.

FICO Score Rating – How is the Fico Score calculated, and how each factor affects your score.

Understanding Fico Scores – A dipper look into the different versions of FICO, explaining many misconceptions.

How Often Do Fico Scores Change – On what schedule do the credit bureaus update your score.

Credit Score Range – A summery list of all the credit score ranges, including a graphic illustration of credit score scale.

What Are Good Credit Scores? – An answer to this very common question.

Average Fico Score – Average US Fico Scores by state and age.