Do you consistently strive to improve your credit score?
If so, great! Improving your credit score over time can help you qualify for more credit (and better credit) at lower interest rates.
The higher your score, the more credit opportunities you have and the less you'll pay for them.
But if you find yourself getting hung up on achieving the "perfect" score, think again. While there is a number that you can strive to reach at the top, the effort is more or less not worth your time.
Because we all have more than one credit score. In fact, you could have 30+ credit scores right now. And they're all factored slightly differently - making that goal of a perfect score nearly unobtainable.
Consider the following:
- Companies compete to create the best credit scores
- Credit-scoring agencies create different credit scores for different types of lenders
- There are different versions of the same score
- You have different credit scores based on each report
Because of the factors above, it's not that hard to end up having ten, twenty, even thirty different scores.
That's why it's more important to focus on the range your credit score falls into rather than the score itself. But before we get into that, let's dive a little deeper into credit scores and credit reports.
Credit scores were developed to help lenders understand your likelihood of repaying your debt. However, they're a relatively new invention. For years, companies used a credit report to assess risk:
A History of Credit Reports
The current credit reporting system dates back to the turn of the 20th century.
Before the credit score was developed, merchant associates kept notes on someone's ability to repay debt.
If you were a lender and someone applied for a loan or line of credit, you could contact a local credit reporting group and ask about them.
This was before the advent of credit cards and the prevalence of small personal loans.
Often people would ask for credit from stores directly. (Perhaps you remember or heard of people buying groceries “on credit” - this is just one example of how that would happen).
Over time, the credit-reporting groups grew, consolidated, and formed national credit bureaus.
Even now, there are still hundreds of consumer credit reporting companies. But, many are relatively small or service particular industry, such as collecting data related to checking accounts or prescription drug purchases.
The three largest consumer credit bureaus are Equifax, Experian, and TransUnion. They collect payment information on payments to your credit accounts, such as a loan or credit card.
The bureaus add public records information, such as a bankruptcy, and identifying information, such as a Social Security number, to the reports. They also record each time you, or someone else, check your reports.
The passing of the Fair Credit Reporting Act in 1970 standardized what can, and cannot, be in your credit reports. It also limits who can access your credit reports and your right to view a copy of your reports.
The bureaus are for-profit competitors and don’t readily share information with each other. But, if you submit a fraud alert to one bureau, by law they must forward it to the other two.
What Is a Credit Score?
A credit score helps lenders judge the risk that an applicant won’t repay a loan. Credit scores are often three-digit numbers, and the most popular scores have a range of 300 to 850. The higher your score, the more attractive you look to lenders.
Good credit can make you eligible for additional financial products, such as rewards credit cards or an unsecured personal loan.
Lenders may also give you a lower interest rate on your loan or credit card if you have a high credit score:
How Your Credit Score Can Affect Your Future Mortgage Rate
|Credit Score Range||30-Year Fixed Rate Mortgage||5-year fixed rate mortgage||7/1 ARM|
How Your Credit Score Can Affect Your Next Car Loan
|Credit Score Range||60-Month new Car Loan||40-Month Used Car Loan|
How Your Credit Score Can Affect Your Next General Loan
|Credit Score Range||HELOC||Home Equity Loan|
1. Companies Compete to Create the Best Credit Scores
Founded in 1956 as Fair, Isaac and Company (FICO) is one of the largest credit-scoring agencies in the world. FICO credit scores are the also the most widely used by lenders.
FICO bases most of its scores on information in your credit reports. For an average person, most FICO scores rely on the following criteria:
FICO Credit Score Factors and Their Percentages
|FICO credit score factors||Percentage weight on credit score:||What it means:|
|Payment history||35%||Your track record when it comes to making (at least) the minimum payment by the due date.|
|Amounts owed||30%||How much of your borrowing potential is actually being used. Determined by dividing total debt by total credit limits.|
|Length of credit history||15%||The average age of your active credit lines. Longer histories tend to show responsibility with credit.|
|Credit mix||10%||The different types of active credit lines that you handle (e.g., mortgage, credit cards, students loans, etc.)|
|New credit||10%||The new lines of credit that you've requested. New credit applications tend to hurt you score temporarily. Learn more about FICO credit score|
A competitor to FICO, VantageScore Solutions, was created by the three major credit bureaus in 2006. Like FICO, VantageScore Solutions rates consumer’s credit risk based on information in a credit report.
FICO and VantageScore lead the consumer credit rating industry in the US, but there are also smaller competitors.
Some lenders and credit card issuers even have internal credit-scoring systems to assess applicants. All of this competition can lead to a lot of different scores for everyone.
2. Credit-Scoring Agencies Create Credit Scores for Different Types of Lenders
Not only do different credit scoring bureaus create different credit scores, different lenders also run different algorithms based on the credit product you're applying for (such as credit cards, auto loans, personal loans, and mortgages).
Therefore, you may have different credit scores for a particular kind of lender or loan.
For example, FICO has a base scoring model, the FICO Score, as well as industry-specific scores. There is a FICO Bankcard Score for credit card issuers and FICO Auto Score for auto lenders.
FICO’s industry-specific scores are refined versions of the base scores. They rely on the same fundamental scoring criteria, but your history with a credit card or auto loan will have a greater impact on the industry-specific score.
There’s also a different range of scores. FICO base scores go from 300 to 850, while the industry-specific scores have a 250 to 900 range (higher is still better).
There are also credit scores created for non-lending purposes. The LexisNexis Attract Insurance Score is one such score. Some home and auto insurers use it to gauge the risk of potential insurance customers.
3. There Are Different Versions of the Same Credit Score
FICO doesn’t use the same algorithm it did 20 years ago. Instead, it changes the calculations and tries to improve its ability to predict risk.
The latest base FICO scoring model, FICO Score 9, was introduced in August 2014.
It treats medical debt and paid collection accounts differently than the previous version. Even so, many lenders still use the FICO Score 8 model. Some mortgage lenders may use even older versions.
There are also several versions of the FICO industry-specific scores.
VantageScore is currently on version 3.0, released in March 2013. Among other changes, VantageScore 3.0 has a 300 to 850 range. Previous VantageScore versions used a 501 to 990 range.
4. You Have Different Credit Scores Based on Each Credit Report
When a lender checks your FICO credit scores, they purchase the score from a credit bureau.
The bureau uses a FICO scoring model to generate a credit score based on the information in your file. The lender often pays the bureau a fee, and the bureau pays FICO for using its algorithm.
Although your credit reports are likely similar at the three major credit bureaus, there may be slight differences.
This could lead to a different score from each bureau. Even when the information is identical, you could wind up with the different scores because FICO customizes the scoring system for each bureau.
If you notice a significant difference between the scores, you may want to check your credit reports for errors.
Combine all the different scoring models and multiply by three for each of your credit reports, and with FICO alone you have over 50 different credit scores.
What If You’re “Unscorable?”
While you could have dozens of credit scores, many of the scoring models rely on information that’s in your credit reports.
If you’ve never had a credit card or loan, there may not be a lot of information in your reports.
Even after taking out a secured credit card (which is a great way to start building credit), it could take several months to become “scorable.” VantageScore 3.0 can create a score with just a single month of payment history, but FICO base and industry scores require at least six months of history.
Those that don’t meet the criteria are called “unscorable” by the industry.
However, even if you’re unscorable with some credit-scoring systems, you could still have several credit scores.
The FICO Score XD uses public records information and data on utility and telecom payments to score people.
PRBC, a consumer credit reporting agency owned by MicroBilt, also creates credit scores based on alternative payments. So, even if you're completely new to credit, you may still have some form of a credit score.
The Credit Score That the Lender Uses Matters Most
You may have dozens of credit scores, but the one you should be most concerned about is the one that a lender is about to use. Often this is one of the FICO scores.
If you plan on applying for a new credit card, loan, mortgage, or another line of credit, you could ask the financial institution which credit report and scoring model they use. They may not be open to giving you this information (nor are they required to be), but it can't hurt to ask.
Keep in mind that credit scores change over time. Your score depends on the information in your credit report when it’s pulled. If the lender checks your credit a week later, it may get a different score.
Also, don’t get duped into purchased a credit score that won’t be helpful. Some companies sell “educational credit scores” that aren’t used by lenders.
Although the score may be a close approximate to the score a creditor uses, it’s best to get the exact same score when possible.
Plus, many credit card issuers and banks are starting to give out credit scores for free (for example, you can get yours from Discover without even being a customer) so there's no need to pay for your score.
There’s No Perfect Score
You may occasionally hear about someone that has a perfect credit score. As you now know, they may have one perfect credit score, but they actually have many different scores.
What’s more, it may not make much of a difference. Once you’re in a lender’s “excellent” tier, often a base FICO score in the mid-700s, you might not be able to get any better terms.
Rather than striving for a perfect score, it could make more sense to focus on what’s in your credit reports. Think of the aphorism, “a rising tide lifts all boats.”
Most credit scores rely on the same data and improving the fundamentals could help lead to higher credit scores across the board. Try to pay bills on time, avoid high balances, use different types of credit accounts, and don’t apply for many new accounts at once.
Keep an eye out for errors on your report. Factors unknown to you could be bringing your score down, but you have the ability to dispute them.
Pull your credit report from annualcreditreport.com each year to ensure that everything listed on there is, in fact, yours.