The truth is that you have many credit scores. The good news is that they’re all likely to move in the same direction — depending on whether you’re a good credit witch or a bad credit witch (we know, you’re not a witch at all — couldn’t resist) and that you can get your hands on them without paying a penny. Here’s the deal.
Why So Many Scores
First, some background: Each of the three major credit bureaus — Experian, Equifax and TransUnion — collects information about you from financial institutions and public records that they use to compute your credit score. For years, these three bureaus used a credit scoring system created by the Fair Isaac Corp. (now just plain FICO), which is why scores are often referred to as “FICO scores.” Today, FICO has competition from a company called VantageScore, which was actually created by the bureaus itself. It’s not as common as FICO but gaining fast. Last year, 12 billion Vantage scores were generated — about 9 billion for lenders and 3 billion for consumers themselves, says Vantage Vice President Jeff Richardson.
What is less well-known is that there are multiple versions of each credit score. In the same way that Apple created the iPad to meet different needs than the iPhone, FICO and Vantage have created industry-specific credit scores, auto scores for auto lenders, credit card scores, for credit card companies. Each scoring version is calculated differently by modifying how certain parts of your credit history are weighted. There’s also the fact that every so often the scoring companies release updated versions of their scoring modules that lenders adopt because they help them even better predict whether you’re likely — or not — to repay the money they lend you.
Does All Of This Matter To You?
Yes, but don’t obsess. Before applying for a loan, many consumers pull a quick, free credit report online. Only when they are turned down for that special zero percent financing rate or a mortgage do they learn that their lender was using an entirely different model — one that showed their score as 100 points lower.
It’s not that the higher score they saw was necessarily wrong — it’s just that a different algorithm was used in calculating that score. A potential lender may look at one score or three, from the same scoring company or different ones, and they may pull from different models for the same loan. The frustrating part is that you’re not going to know, or be able to control which score your lender is looking at.
So What Can You Do?
Keep your credit habits clean. The most important thing to keep in mind is that all — all! — of these scores are based on the same five things. And although you cannot micromanage them, good credit behavior can keep them moving in the right direction (or keep them high if they’re already there.)
You have to:
1. Pay your bills on time, every time.
2. Keep your credit utilization (i.e., the percentage of your credit lines that you’re actually using) on each card and all your cards combined at below 30%.
3. Stop applying for credit you don’t need (it makes you look desperate).
4. Don’t close cards you’re not using unless they charge fees (it hits utilization negatively).
5. Try to maintain a mix of credit.
That’s it. If you want to move improve your credit quickly, either pay down some debt or ask for an increase in your credit limits, then don’t use the extra capacity.
Oh, And Stay Vigilant
The other thing you can do is monitor your own credit — for free. (There’s really no need to pay for credit scores, ever, Richardson notes.) Credit Karma can help with this. You can – and should — also pull all three of your credit reports (once a year, at no charge) at AnnualCreditReport.com. If you find errors on your reports, report them to the individual bureaus and then follow up to make sure they’re gone. About 20% of credit reports have errors and while most are not of the type that will ding your score, some do. You don’t want them to be yours.
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