Understanding Your Credit Score

Your credit score is a number designed to help lenders evaluate the likelihood that you will repay borrowed money as agreed. Credit scores are calculated using information contained in your credit reports, but the score itself is not part of your credit report.

Most commonly used credit scores fall within a range of 300 to 850, with higher scores generally indicating lower credit risk. However, you do not have just one credit score. Your score can vary depending on the credit bureau providing the information, the scoring model being used, the version of that model, and the type of credit you are applying for.

This is why the score you see through a credit-monitoring service may not always be the exact same score a mortgage lender, auto lender, or credit card company sees.

Why Do I Have Different Credit Scores?

It is completely normal to have different credit scores. There are multiple credit scoring models, and lenders do not all use the same one.

Your scores may differ because:

• Your three credit reports may contain different information. Not every creditor reports to Equifax, Experian, and TransUnion, and information may be updated at different times.

• Different scoring models may be used. Two of the best-known credit scoring brands are FICO® and VantageScore®, and each has multiple versions.

• The type of loan can matter. A mortgage lender, auto lender, and credit card issuer may use different scoring models designed for their particular type of lending decision.

• Scores can be calculated at different times. A newly reported balance, payment, account, or other change to your credit report can cause a score to change.

For these reasons, a score you see through a free credit-monitoring service can be useful for tracking your credit, but it may not be identical to the score a particular lender uses.

What Factors Affect Your Credit Score?

Credit scoring models evaluate information in your credit reports to estimate credit risk. The exact formula varies depending on the scoring model, but several factors commonly influence your scores:

• Payment history. Paying accounts on time is an important part of maintaining strong credit. Late payments and other serious delinquencies can negatively affect your scores.

• Amounts owed and credit utilization. Credit scoring models consider how much debt you owe. On revolving accounts such as credit cards, using a high percentage of your available credit can negatively affect your scores.

• Length of credit history. The age of your accounts and how long you have been using credit can be considered.

• New credit. Applying for and opening several new credit accounts within a short period may affect your scores.

• Credit mix. Scoring models may consider your experience managing different types of credit, such as revolving accounts and installment loans.

The importance of each factor can vary depending on the scoring model and the information contained in your individual credit file.

What Is Credit Utilization?

Credit utilization refers to how much of your available revolving credit you are using. It is most commonly associated with credit cards and other revolving accounts.

For example, if a credit card has a $5,000 limit and the reported balance is $1,000, the utilization on that card is 20%.

Credit scoring models may consider both the utilization on individual accounts and your overall revolving credit utilization. In general, lower utilization is better for your credit scores, although there is no single percentage that guarantees a particular score.

Your credit card balance is typically reported to the credit bureaus at a particular point in the billing cycle. This means that even if you pay your balance in full each month, a high reported balance can sometimes temporarily affect your score.

Keeping revolving balances manageable and paying them down can be one of the more responsive ways to improve a credit profile when high utilization is affecting your scores.

Does Checking Your Credit Hurt Your Score?

Not every credit check affects your credit score. The difference depends on whether the credit inquiry is considered a soft inquiry or a hard inquiry.

• Soft inquiries generally do not affect your credit scores. Checking your own credit report or credit score is typically a soft inquiry. Certain account reviews and pre-screening activities may also appear as soft inquiries.

• Hard inquiries may affect your credit scores. These generally occur when you apply for new credit and a lender reviews your credit as part of its decision.

A single hard inquiry usually has a relatively small impact for most consumers, but several applications for new credit within a short period can have a greater effect.

Some credit scoring models also recognize that consumers may rate-shop for certain types of loans, such as mortgages or auto loans. Multiple qualifying inquiries made within a specified shopping period may be treated differently than unrelated applications for several new credit accounts.

Most importantly, checking your own credit does not lower your credit score, so you should not be afraid to monitor your credit reports and scores regularly.

Why Did My Credit Score Suddenly Change?

Credit scores can change whenever information on your credit reports changes. Sometimes even a relatively small change in your credit file can cause your score to move.

Common reasons your score may change include:

• A credit card reported a higher or lower balance. Changes in revolving credit utilization can affect your scores.

• A payment was reported late. A newly reported delinquency can have a significant impact on a credit profile.

• An account was opened or closed. This can affect available credit, account age, utilization, and other scoring factors.

• A collection or other negative account was added, updated, or removed.

• A hard inquiry or new account appeared after you applied for credit.

• Information aged on your credit report. The influence of credit information can change over time as your credit history develops.

A score change does not necessarily mean something is wrong. However, if your score changes unexpectedly, review all three credit reports to see what information changed and make sure everything being reported is accurate.

What Is a Good Credit Score?

Most commonly used credit scoring models have a range of 300 to 850, with higher scores generally indicating lower credit risk. However, there is no single credit score that every lender considers “good.”

Lenders establish their own approval standards based on the type of credit being requested, the scoring model they use, and other information considered during the application process. A score that qualifies for one product or interest rate may not qualify for another.

Your credit score is also only one part of a lending decision. Depending on the type of financing, lenders may consider your income, existing debts, debt-to-income ratio, down payment, employment history, and other factors.

Rather than focusing on reaching one particular number, concentrate on building a healthy overall credit profile through consistent on-time payments, manageable revolving balances, responsible use of credit, and accurate credit reporting.

How Can You Improve Your Credit Score?

There is no legitimate way to guarantee a specific credit-score increase, but there are steps you can take to build a stronger credit profile over time.

• Pay every account on time. Consistent on-time payments are an important part of maintaining healthy credit.

• Reduce revolving credit card balances. Lower utilization can help when high balances are affecting your scores.

• Avoid unnecessary applications for new credit. Apply for credit strategically rather than opening several accounts within a short period.

• Keep established accounts in good standing. Older accounts can contribute to the length of your credit history, so consider the potential credit impact before closing an established account.

• Review all three credit reports for accuracy. If information is inaccurate or incomplete, you have the right to dispute it with the appropriate credit reporting company.

• Give positive credit behavior time to work. Credit scores can respond as information on your reports changes, but rebuilding a credit profile is generally a process rather than an overnight event.

Understand Your Credit. Build a Stronger Future.

Understanding what affects your credit score is an important part of taking control of your financial future. A credit score is not permanent—it can change as the information in your credit reports changes.

At Credit Help USA, we help clients understand what is affecting their credit, review their credit reports for information that may be inaccurate or incomplete, and develop a personalized strategy for building a stronger credit profile.

Our goal is not simply to focus on a number. We want our clients to understand their credit, make informed financial decisions, and develop habits that can help them maintain healthier credit long after the credit repair process is complete.