Your credit history and score play a large role in your personal finances. It can impact everything from taking out a mortgage, to buying a car, renting an apartment, or even refinancing your student loans.
Credit scores started to become an important factor for consumer lending in the 1970s. And in 1989 the most widely adopted credit score was created by the Fair Isaac Corporation and is now most often referred to by its acronym—FICO®.
Credit scores are not administered by the government, but rather by credit bureaus or credit reporting agencies. These bureaus collect and maintain consumer credit information and then resell it to other businesses in the form of a credit report.
While the credit bureaus operate outside of the federal government, the Fair Credit Reporting Act, allows the government to oversee and regulate the industry .
Banks and other lenders use credit scores to gain an analytics-based view into an individual’s financial picture. But which credit bureau is the most used? There are three major credit bureaus in the U.S.—Equifax, Experian, and TransUnion.
Will My Credit Score be the Same Across the Board?
In a word: no. Credit scores vary depending on the company providing the score, the data on which the score is based, and the method used to calculate the score.
In an ideal world, all credit bureaus would have the same information. But because not all lenders and creditors report information to each bureau , there may be some discrepancies in your credit report from bureau to bureau.
Each bureau also uses a slightly different scoring model, which can cause your credit score to vary from bureau to bureau. The scoring model most often used by lenders are FICO scores.
Both TransUnion and Equifax also share “educational credit scores .” These types of credit scores were developed with the intention of helping consumers understand their credit scores more fully. Each bureau uses their own proprietary scoring model to calculate educational scores.
In 2017, both Equifax and TransUnion were fined by the Consumer Financial Protection Bureau (CFPB) for misleading consumers about “the usefulness and actual cost of credit scores they sold to consumers.” According to the CFPB, both credit bureaus misled consumers by implying that the educational scores they sold were the same ones lenders often used when determining their lending decisions. In reality, according to the CFPB, the educational scores being sold weren’t frequently used by lenders to make lending decisions.
As the CFPB’s statement shows, there are a variety of models for calculating credit scores, even within a certain bureau. For instance, there have been more than 60 different FICO scoring models since 2011, including industry-specific scoring models (for credit cards, car loans, mortgages, and more).
When it comes to borrowing a mortgage, it’s very likely that scores from all three major credit bureaus will be pulled for mortgage applicants, using the following models :
• FICO® Score 5 based on Equifax data
• FICO® Score 2 based on Experian data
• FICO® Score 4 based on TransUnion data
How Are Credit Scores Calculated?
Regardless of the exact scoring model used, most credit scores are calculated with a similar set of information. According to Equifax , this includes information like how many and what types of accounts you have, the length of your credit history, your payment history, and your credit utilization ratio .
Lenders generally like to see evidence that you have successfully managed a variety of accounts in the past. This can include credit cards, student loans, and mortgages, in addition to other types of debts. As a result, scoring models sometimes include the number of accounts you have and will also note the different types of accounts.
Reviewing the length of your credit history allows lenders to see if you have a record of repaying your debts responsibly over time. Scoring models will factor in how recently your accounts have been opened.
Reviewing your payment history allows lenders to see how you’ve repaid your debts in the past. Your payment history will show details on late or missed payments and bankruptcies. Scoring models typically look at how late your payments were, the amount you’ve owed, and how often you’ve missed payments.
Each scoring model will place a different weight of importance on each factor.
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How to Find Your Credit Score
It’s important to have a general understanding of your credit score since it impacts all types of lending. If you plan on buying a car with an auto loan or taking out a mortgage to buy a home, having an idea of what your credit score is can help you determine what your loan may look like and how much you can afford to borrow.
You can request a free copy of your credit report once a year from each of the major credit bureaus. If you check your report and see any incorrect information, you can contact the credit bureau directly to have it removed.
Improving Your Credit Score
Credit scores aren’t set in stone. Here are some strategic steps to consider for those trying to improve their scores:
• Making payments on time. This includes credit card payments, rent, debt payments, utilities, and any other monthly bills or payments. Lenders often consider past behavior to be an accurate predictor of future behavior and generally want to avoid lending money to individuals with a history of missed payments .
• Keeping credit utilization ratio below 30%. Lenders generally like to see a credit utilization ratio of 30% or lower . It’s an indicator that the borrower can effectively manage their credit.
• Being selective when opening new credit accounts. Opening a new credit card or borrowing a new loan generally involves a hard credit inquiry , and too many hard credit inquiries can have a negative impact on the applicant’s score . So while having a diverse mix of credit can improve someone’s credit score, opening a number of new accounts may be counter-productive .
One of the biggest takeaways is that consistency is key for those trying to change their credit score. Credit scores aren’t likely to improve overnight, but sticking with a long-term plan can help repair a borrower’s credit over time.
SoFi Personal Loans
If you’re getting ready to make a large purchase (getting ready for a home renovation?), you may wish to consider using a personal loan instead of another credit card. Personal loans can give you access to the cash you need up front and generally have lower interest rates than credit cards.
Personal loans can also help you consolidate your credit card debt into one new loan. This way there is one monthly payment to manage, and you’ll hopefully be paying a lower interest rate—which could mean you pay less over the life of the loan. To see how much a personal loan could save you, take a look at SoFi’s personal loan calculator.
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The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the
FTC’s website on credit.
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