Is Your Credit Score As Important As It Used to Be?

Many lenders use credit scores to rate your financial health and determine how much they can lend to you. These three-digit numbers are based on your credit report and factor in payment history, amount owed, length of credit, types of credit and new credit.

However, it may be confusing to see your score with different lenders or even credit monitoring services all seem to differ. This is because credit scores are a snapshot of your credit at a point in time.

Credit Scores

Your credit score is a three-digit number that lenders and creditors use to help them evaluate your credit risk. It’s a snapshot of your credit behavior, calculated based on information in your credit report. Credit scores vary by the credit reporting agency, the type of credit report and the scoring model used.

Your credit scores are a key factor in whether you’re approved for a mortgage, auto loan, credit card or other types of credit. They also determine the interest rate and terms you may be offered. The main components of your credit score are: payment history (including how far behind you are on a payment, how often you’re late and whether you’ve brought past due payments current), amounts owed, length of credit history, the mix of account types and new credit accounts. The three major consumer credit bureaus, Equifax(r), Experian and TransUnion, use their own proprietary scoring models to produce your credit scores. FICO and VantageScore are two popular scoring models.

FICO Scores

FICO scores are a key component of a credit report and help lenders determine if they can trust borrowers to pay back debts. They take into account payment history on retail accounts, credit cards and installment loans like mortgages and auto loans. Public records such as bankruptcies, foreclosures, suits, liens and judgments are also considered. Other factors include the length of credit history, the age of the oldest and newest accounts, credit mix, and credit utilization-the percentage of available credit being used.

A FICO score ranges from 300 to 850 and is the most popular system that credit card issuers, lenders and banks use to decide whether to approve applicants for loans, what loan amounts they can qualify for and how much interest a borrower will pay. A high FICO score opens doors to more financial opportunities, including renting an apartment, obtaining better credit cards and purchasing car insurance at lower premiums. FICO also produces industry-specific FICO scores for different types of credit products and industries.

VantageScore

Like FICO scores, VantageScore credit scores are a snapshot of your credit at a specific point in time. The score is calculated based on information that has been reported to the credit bureaus by lenders, as well as your own spending and borrowing habits.

The same factors that affect your FICO scores also impact your VantageScore, but with varying weights. For example, payment history is considered “extremely influential,” while credit utilization—the amount of debt you have relative to your credit limit—makes up just 20% of the score. You can improve this metric by making on-time payments and keeping your revolving balances below 30% of the maximum limit.

VantageScore Solutions claims its latest version of the model, 4.0, uses “machine learning” and trended data to better predict consumer behavior over time, which can be used to identify those who are more likely to pay their bills on time. This can be especially useful for those with thin credit files who haven’t been scored by FICO or other scoring models.

Credit Reports

Credit scores and credit reports provide a snapshot of how responsible you have been with your debts and bills. A good score can open doors (and save you money on loans, insurance premiums and apartment rentals) while a poor score can hinder your financial freedom.

Credit reports contain the raw data that goes into your credit scores and determine whether financial institutions will extend you loans and credit cards and at what terms. Credit reporting agencies compile all the information in your file into your credit score, which is based on five main factors: payment history, amounts owed, length of credit history, types of credit used and new credit.

The amount you owe — including balances on credit cards and other revolving accounts — makes up about 35 percent of your credit score. Keeping the amount you owe low by staying under your credit card limits and not maxing out your cards can help raise your credit score. https://www.youtube.com/embed/6Q4orwGx6ws