Credit 101: Intro to Credit Score
HOW TO IMPROVE YOUR SCORE AND WHY IT'S IMPORTANT
The second part of our credit series will focus on credit score basics.
By now you should have obtained a copy of your credit report and become familiar with the different sections. If not, check out the previous post in the series, “Intro to Credit Report.”
IMPORTANCE
A high credit score can save you hundreds, if not thousands, of dollars over your financial life. That’s because a credit score is a grade that tells a lender how likely you are to repay a debt. The lower the risk that you’ll fail to repay, the less incentive the lender needs to give you access to the funds.
Simple? Not always. There are two major scoring models, the FICO model and the VantageScore model. Currently the FICO model has 28 variations and the VantageScore model has 4. As a result, the score you receive from your credit card company is likely to differ from the score your mortgage or auto lender pulls. Even if you purchase your credit score directly from Experian, Equifax or TransUnion, there is a good chance the model they are using is a different model than what they are sending to your lender.
FACTORS
Both the FICO and VantageScore models look at five factors in determining your credit score:
Payment history
Have you made all your payments on time?
If not, how many days did the debt go unpaid?
Do you have accounts in collection or have you had a bankruptcy or foreclosure in the last seven years?
Amounts owed
How much have you borrowed?
What is your utilization ratio (How much have you borrowed compared to how much you have available)?
Length of credit history
How many years has your oldest account been open?
What is the average age of your credit?
How long has it been since you had any credit activity?
Credit mix
Do you have only one type of account (ex. credit cards) or do you have a mix of installment and revolving debt?
New credit
Do you have recent inquiries?
Have you recently opened new credit accounts?
DIFFERENCES
Below is an infographic from the FICO blog breaking out the weight of each factor listed above.
https://blog.myfico.com/5-factors-determine-fico-score/
The VantageScore model looks at the same five factors as the FICO model, but they are weighted differently. Whereas age of credit and credit mix rank lowest on the FICO model, they are the second and third highest on the VantageScore model.
https://your.vantagescore.com/score-influences
NEXT UP
Over the next few weeks we’ll look at the different factors in depth.
Reading your report
Addressing errors
Addressing mishaps
Protecting your credit
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