The world of credit scores can be daunting. Whatever your credit history may be, the good news is that it’s never too late to turn things around.
What’s important is being proactive about checking your score and making a habit out of good credit best practices. Although it may take some time for your score to change, it’s important to remember this is a marathon, not a sprint. As long as you’re moving forward, you’re heading in the right direction.
What is a credit score?
In the past, there was not one formula for measuring credit scores, and as a result, many institutions created their own. As you can probably imagine, this created a lot of inconsistency and confusion.
While there are still different methods of credit score calculation, the Fair Isaac Corporation created the FICO Score, with one scale and one formula. FICO is the most widely recognized and is used by about 90% of lenders. FICO credit card scores range from 300-850 (300 being the worst, 850 the best). However, individual lenders can decide on their own what their cutoff is for risk for potential borrower (i.e. lender 1 decides 550 is its cutoff, while lender 2 is 625).
Some lenders will work without a credit card score, using things like your bill pay history and references to establish ability to pay. That said, credit score is a calculation that can summarize your ability to pay relatively simply, which is why most lenders use it as tool.
Who Decides My Score?
Three companies, or credit bureaus, have scoring systems, TransUnion, Experian, and Equifax. You may notice, after generating a credit report or two, that you have differing numbers from each bureau. Typically they are not wildly differing, but there are a few reasons why this happens.
One factor that can create different scores is the date of the report. Credit bureau 1 may be using information from 1/15, while credit bureau 2 is using 2/1, and maybe you made a huge payment on 1/23.
Another reason is the different scoring methods- although FICO is the most popular, there are still other formulas that can be used.
Finally, each bureau only has the information available that a lender decides to offer, and not all lenders report all information to the three bureaus.
It’s not uncommon to have three different scores from the three reporting bureaus, so if you find that’s the case, don’t worry. More information on the differences in reporting here: https://www.creditkarma.com/article/differentscores
Note: you are entitled to a free credit report from each of the three credit bureaus annually. You can either go to the individual websites of each bureau or see the handy ‘one stop shopping’ link below.
What Affects My Credit Score?
There are several factors that affect your credit score, some weighing more heavily than others. The top three factors are:
- Making Payments on Time
- Utilization, a.k.a. Amount Owed (the percentage of your allowed credit that you’re currently using- 10-20% is ideal).
- History of Collections/Bankruptcies.
Other factors include the amount of time you’ve had open accounts (generally, so long as you are in good standing, the longer you have had an account, the better), types of credit (credit cards, car loans, mortgage, etc), and adding new credit.
If you’re worried about past decisions in your financial history that negatively impact your score, this chart from VantageScore might put your mind at ease:
Where Do I Get a Report?
Now that you know a bit more about credit card scores, you might be wondering where to find your own. Here are three places to look into:
- Annual Credit Report https://www.annualcreditreport.com/
- Your Lender (often, when you apply for a loan or line of credit, you’ll get a free credit score. Ask us at Oak Bank how you can get yours!)
If you see an error in any of your reports, you can report it with whichever bureau(s) have the faulty information by filling out a simple form.
Your credit score doesn’t have to be a scary, mysterious number. Check your credit score regularly (checking once a month or less does not impact your score), and remember to make regular, on-time payments, keep your utilization low if you can, and stay informed about interest rates and penalties. Like anything, a bad credit score can turn around with consistency and perseverance!