Understand Your Credit Score

Your credit score shows your creditworthiness to lenders. It may either help you get a mortgage approval and low credit rates or become an obstacle to your goals. That’s why it is so important to understand your credit score and keep it under close control.

How your credit score appears

Getting credit for the first time establishes your credit history. But your credit score appears only when you start paying off your loan or a credit-card debt. For example, a student loan establishes your credit history but not a credit score since you don’t make any payments at first.

As soon as you make your first payment, your creditors start reporting on your payment activities to credit bureaus. The bureaus assess the received data according to various criteria and calculate your credit score. Every report from lenders – good or bad – contributes to your credit history and may affect your score.

What affects your credit score

Credit bureaus may use different models for score calculation. Most commonly, your score is a three-digit number from 300 to 850 computed according to the FICO standards. Nobody knows the exact formula of score calculation but you can control the following key factors:

⦁ Payment history. This is the crucial factor in any scoring model. It includes the number of late payments, period of delay, type of credit, defaulted debt and much more. The only advice here is to make all payments regularly and on time.

⦁ Utilization rate. It means simply how much debt you have compared to available credit limits across all of your credit products. To have a good credit score, you should use up to a third of your credit limits.

⦁ Recent requests for new credit. When you apply for a new credit product, your potential lender requests detailed information on you from credit bureaus. These so called hard inquiries may hurt your score. Your own credit report requests as well as those from your potential employers are soft inquiries (not so detailed) and have no impact on your score.

Keeping your eye on these three factors helps you control up to 80% of your credit score.

Why you have multiple credit scores

Every credit consumer has various credit scores. Your current score may vary because of some technical reasons:

⦁ Your lenders don’t provide full information in credit files.

⦁ Your lenders report not to all three, but only one or two major bureaus.

⦁ Different bureaus calculate your score using different models.

However, it is also a credit check purpose what matters here. Your score may be calculated differently to assess your creditworthiness for various types of credit products. Thus, credit card issuers normally request your FICO® Bankcard Scores or FICO® Score 8 from the bureaus, while most mortgage lenders prefer Base FICO® Score versions which were before FICO® Score 8.

The bottom line

Your credit score helps your potential lenders measure credit risks and predict your payment behavior. But it also helps you control the outcome of credit, job, and rental applications. Watch your score and let it open doors for you.