The Credit Score System is a mathematical model that evaluates many types of information in a consumer credit file (i.e. credit report).
The output of the mathematical model is a single number in the range of 300 – 850 (in the case of FICO Credit Score) that represents the risk of lending you money. The lower your credit score is – the higher risk that you represent, and as a result the less likelihood a company will lend you money.
Credit scores are widely used by lenders to determine whether a person qualifies for a particular loan, credit card or service. For those that do qualify – their credit scores determine the interest rated they are required to pay and their monthly payments.
Credit score systems have been introduced the 1950s. Many types of credit score ranking has been developed since, with more than dozen in use today. Still, the most commonly used is the FICO Score system, developed by Fair Isaac.
Understanding Credit Scores and How the System Works
There are three major credit bureaus: Equifax, Experian and TransUnion. Each collects information on your current financial status and maintains a record of your credit history. All that information is compiled into your personal file, also called a credit report.
Your credit report file is fed into a mathematical model, yielding a single number – Your Credit Score. This number is a quick way for lenders to assess the risk of lending you money. See FICO Score Rating Formula for more information.
When you apply for a loan, insurance, home rental of even a job – your potential lender/insurer/employer requests your credit report and credit score from one, two or all of the 3 major credit bureaus. Even that fact gets into your credit report.
After evaluating your credit score and report the lender/insurer/employer grants of declines your request.
If you are approved for a loan – your credit score will be further used to determine your interest rates and monthly payment. The higher your score is – the better (lower) interest rates that you will get (See this for more information).
What factors go into my credit score?
Different credit scores use different formula and give different weights to each factor in order to compute your credit score.
Almost all credit score systems use the following factors to some extent:
- Payment history – A good record of on-time payments will help your credit score and vise verse.
- Outstanding debt – High balances in relation to your credit limits (balance/credit ratio) can harm your credit. Aim for ratio under 35%.
- Credit account history – An established credit history makes you a less risky borrower. The older your (positive) records are – the higher your score will be.
- Recent inquiries / New credit – When you apply for a loan or more credit – the lender/creditor checks your credit. This registers a hard inquiry and causes a slight ding to your credit score. Apply for new credit in moderation.
- Derogatory credit information – Bankruptcies, charge-offs collections and any financial ruling against you will harm your credit score.
- Types of credit – A healthy credit profile has a balanced mix of credit accounts and loans.
So How Can I Get My Free Annual Credit Score
Unfortunately, free credit scores are not included in your free annual credit report. Although the FACT Act states that your credit score must be provided to you upon request – this service is not free. Many companies offer paid credit scores or credit score monitoring services, including each of the three major credit bureaus.
Why do my 3 credit scores differ?
Because not all lenders and creditors report to all credit bureaus – the 3 major credit bureaus may have slightly different information about your credit history, which means that your credit score may vary somewhat from bureau to bureau.
Three Versions of FICO Score Rating
Another reason for the differences between the 3 credit report score across the bureaus is because each of the 3 major credit bureaus has incorporated small changes to the classic FICO formula.
As if to further complicate matters, each of the three credit bureaus has branded their FICO credit score with a different name:
- Equifax calls its version of the FICO the BEACON credit score.
- Experian calls its version of the FICO credit score the Experian/Fair Isaac Risk Model or Score Power.
- TransUnion calls its version of the FICO credit score EMPIRICA.
Experian no longer uses the FICO credit score system. Instead, it is using the Vantage Score solely. This means that not only you can’t get a FICO score directly from Experian, they don’t allow myFICO.com to provide customers a FICO score based on their Database!
Lender continues to use Experian based FICO scores, but as a consumer you no longer have access to it.