When you want to apply for a credit card or finance a major purchase like a mortgage, one of the many numbers a lender will consider before approving your application is your credit score.
This three-digit number will also determine the interest rate you are offered when you borrow money, which impacts the total cost over the life of the loan. So, before applying for financing, it’s important to check your credit score and see where you stand.
What is a credit score?
A credit score is a three-digit number that reflects your overall creditworthiness or degree of responsibility as a borrower. Lenders use this number as a simple way to assess the risk and likelihood that you will repay what you borrow.
“Based on the details of your credit report, your score tells lenders at a glance how creditworthy you are,” says Leslie H. Tayne, Esq, financial attorney and managing director of Tayne Law Group, PC
In general, credit scores range from 300 to 850, although there are many types of credit scores that can have variations (more on that later).
“The higher your credit score, the better,” Tayne says, but don’t be surprised if it seems like that number is constantly changing. “Because lenders use different credit scoring models, your score may vary each time it is pulled.”
Your credit score is calculated based on a number of factors, and not everything is weighted equally – some things have a bigger impact than others.
Here are the factors taken into account in the calculation of your credit score:
- Payment history (35%)
- Amounts due (30%)
- Length of credit history (15%)
- New credit applications (10%)
- Composition of credit (10%)
Your payment history is the most important factor. Lenders want to know that you are good for the money you borrow and that you can repay it on time. After payment history, there are amounts due, which refers to the amount of available credit you are using. A good benchmark is to aim to use less than 30% of your total credit limit. These two aspects make up the bulk of your credit score, so if you need to improve your credit, focusing on these areas can help.
Types of credit scores
You don’t just have one credit rating; you have dozens of them. There are two big companies – FICO and VantageScore – and both have slightly different ways of calculating scores, which is why your score might be slightly different if you check it on a variety of platforms.
“FICO and VantageScore are brands of credit scores,” explains Rod Griffin, senior director of public education and advocacy for Experian, one of the three major credit bureaus. “It’s kind of like saying General Motors or Ford, and there are different versions of these scores for different types of lenders, or different types of loans, for example, and that’s really why there are so many different scores.”
Thus, auto lenders may use a different credit score than credit card issuers. Each lender may have their own credit score model to help assess risk, although many use FICO.
“The most popular model is the Fair Isaac Corporation (FICO) 8, where a good score is over 670,” Tayne explains.
VantageScore has been around since 2006 and was created by the three credit bureaus, Equifax, Experian and TransUnion. VantageScore uses data from all three bureaus, while FICO may have a different score for each credit bureau. While FICO and VantageScore are the top performers in the credit score space, there are many more. Lenders can use proprietary data to calculate their own credit scores.
How to check your credit scores
Just as there are many types of credit scores, there are many ways to check your credit rating. There are a number of free resources, but some organizations will charge you. It’s perfectly safe to check your score at any time, and it can be a good idea to check it regularly, especially before you make a big financial move, like buying a car or a house.
“Contrary to popular belief, checking your score won’t hurt her,” Tayne says. “Your score will only drop when a potential lender pulls hard on your credit.”
1. Use a credit scoring service or rating site
To check your credit score easily and free of charge, you can use websites such as Credit Karma or Credit Sesame. By registering and creating an account, you can get updates on your credit scores and credit activity, such as a drop or an increase in your score or the opening or closing of accounts.
2. Request your scores from the three major credit bureaus
You can also access your credit score through any of the three major credit bureaus.
- Experian You can sign up for CreditWorks for freeSM Basic and get a free copy of your Experience Credit Report, as well as your FICO score.
- Trans Union You can get a free credit score from TransUnion, usually through one of its partners, such as a bank or credit card. You can also sign up for one of the company’s credit monitoring services and access your credit score, although this usually comes with a monthly fee.
- Equifax To get a free credit score through Equifax, you can sign up for Equifax Basic CreditMT program.
Each credit bureau offers various credit monitoring products, some free and some paid.
3. Check with your bank
Another go-to option for checking your credit score is to go through your bank. Some financial institutions offer credit services that allow you to monitor your credit score and any fluctuation from month to month.
“Credit is essential at many key moments in life: buying a car, renting an apartment, buying a house, etc. says Ralph Haro, Senior Vice President at Capital One. “The earlier you start building your credit history, the better it could be for your credit score.”
You can usually check your score through your online account, mobile banking app, or ask a customer service representative if you’re unsure if this is available to you.
4. Check with your credit card issuer
As credit card competition intensifies, many companies are adding new user benefits, including access to your credit scores. The next time you make a payment, check your account tabs to see if you can access your credit score. You should be able to view it free of charge. Some issuers also offer credit score simulators, so you can see how certain actions (eg, paying off a balance in full, closing an account) can raise or lower your score.
5. Go through a credit counselor
If you are looking to access your credit scores and you are also struggling with debt and feel you need help, you may want to consider working with a credit counselor from an organization at not-for-profit reputed as the National Credit Counseling Foundation (NFCC).
A credit counselor offers advice and works with creditors to help you control your payments through a debt management plan (DMP). Under a DMP, you can make a lump sum monthly payment to the credit counseling agency that works with your creditors.
A credit counselor can also provide credit education and offer a credit file review and access to your credit score. Checking your credit scores is a small but important part of developing a plan to help you manage your debt and achieve your financial goals.
The key is to stick to reliable sources. “Unfortunately, there are many scam websites on the Internet offering free credit scores. Sticking to well-known and reputable sources is the best way to avoid getting scammed,” says Tayne. try a new service, research it first. If the provider has a bad reputation, or none at all, avoid it,”
Credit Score vs Credit Report
Your credit score may be just a number, but it carries a lot of weight. Numerically, it represents your creditworthiness and the type of borrower you are. Your credit score is derived from data in your credit report.
Your credit report, on the other hand, goes much deeper, showing your credit history for the past seven years, loans you’ve applied for and taken out, whether you’ve made payments on time, and any outstanding balances.
If you would like to obtain your specific credit report, you can request it free of charge via AnnualCreditReport.com.
“Your credit score is a tool that lenders use to help them predict whether you will repay a loan as agreed, according to the terms of the contract,” says Griffin. “So it’s like the grade on a piece of paper at school. Writing a paper in school is a lot like your credit report. Your credit report is the source of information used to calculate your credit score, much like information on paper is what will be scored. »
Although you might think you’re done with grades after you graduate, it turns out that the financial world grades you on how you handle your money. Understanding the importance of a good credit score and how to check it can empower you, so you know where you stand and how to improve.
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