You’ve probably heard a lot of things about your credit score, the ominous, mystery-shrouded number that determines whether or not you can get a credit card or a car loan. But while your credit score may seem like a complicated calculus problem you just can’t crack, it’s really just a way for lenders to measure how risky it is to lend to you by converting your credit history into a simple number. That number makes it easy for financial institutions to make quick judgments on whether or not to let you have a mortgage or a loan — as well as what kind of rates to offer you.
It all comes down to this: your credit score is a representation of the information on your credit report. If you have a good credit history, you’ll have a good credit score — but if you have a bad history, your score could need some improvement. Your score is a snapshot of your current credit situation and can fluctuate if your fortunes improve. We’ll walk you through just what makes up your credit score so you can understand how it impacts your credit.
What makes up my credit score?
Though your score is a representation of the content on your credit report, just how lenders calculate that score can vary. Most lenders use a scoring system called FICO, which measures your creditworthiness on a scale of 300 to 850. Any score over 700 will usually be fine getting credit on reasonable terms while any score under 600 will probably have trouble getting credit at all. FICO takes these factors into consideration when calculating your score:
- Payment History: If you have a history of making payments to creditors on time, you’re good here.
- Debt: Owing money isn’t a problem, but having maxed out credit cards is often a warning sign. If you keep your credit card balances relatively low, you’re usually good here.
- Age of Credit History: How long you’ve had credit is also a factor — a longer credit history is better.
- Credit Inquires: A lot of inquiries to your credit report — which may indicate that you’re about to take on a lot of new debt — isn’t a good sign for lenders, either.
- Types of Credit: A variety of different types of credit — say a mortgage and a credit card — will be better than if you have fewer types of credit.
Your credit score may also be calculated on the newer Vantage Score system, which rates your credit from 500 to 900. Though it’s a similar system, it weighs aspects of your credit history differently.
Why isn’t the credit score my lender sees different from the one I see?
Because different lenders may get your credit report from different credit bureaus — which might not be identical — and may use their own scoring system, the number your financial institution comes up with could be different from the credit score you think you have. This can be due to inaccuracies on your credit report, so if your score — or the reasons your lender has given for denying you credit — seem off base, you’ll want to check your credit report and make sure it’s accurate http://www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports.
However, often it’s not the result of an inaccuracy at all: it’s just that your lender is using a slightly different formula or working from the information provided by a different credit bureau to come up with your score. Our advice: even though your credit score is an important number, don’t focus too much on the number. If you’re denied credit because of problems with your financial history, you should focus on addressing those problems instead of why one version of your credit score is better than another.
Does a bad credit score mean I’ll automatically be denied credit?
A good score — or a bad score — doesn’t necessarily mean you’ll automatically be given — or not given — credit. Each lender will be different, and while one might see you as a risk, another might think you a safe bet. While lower scores are more likely to be denied credit — or given credit at higher interest rates — the exact number that makes you a risk will vary from lender to lender. This makes it especially important to shop around for loans — you may find a different financial institution is willing to make you a better offer.
How can I get my credit score?
Though you can get your credit report for free once a year https://www.annualcreditreport.com/index.action, your credit score is not part of that package. However, if you’ve been denied a loan because of your score, you should be able to check your score for free. While you can always pay to see what your credit score is if you’re concerned about it, our advice, again, is to focus on your credit report — which you can get for free — instead of your specific score. Since each financial institution will calculate your score differently, you’re more likely to come out ahead, regardless of the lender, by making sure your credit report looks healthy.