NEW YORK – Your credit score. It’s how most major financial life events begin.
Whether you’re looking to buy a house, lease a car, open a credit card — or even get cable or a cell phone — the powerful three-digit number determines the terms you’ll get. Or if you’ll get credit at all.
But do you know why the number is what it is? How it’s calculated? Or how to change it?
The more you know about your credit score the greater power you’ll have over building it and protecting it, saving you money over time.
1. You have a bunch of different credit scores
People talk about your credit score as if it’s one single number. But actually there are dozens of different credit scores — if not more — devised for different industries and offered by different companies.
But, before you freak out: you don’t have to track all of them.
While many versions of a credit score can make an already confusing measure confounding, and your specific score may vary depending on where it’s coming from, your score by any measure will be in a similar range and there are a few general things scores have in common.
The scales go in the same direction: lower numbers are poorer credit, higher numbers are better credit. And, regardless how the number is calculated or who is offering it, the same behavioral levers lift you from a “bad” score to a “good” score: paying debts on time, maintaining low credit card balances, not getting any more credit than you need.
2. Credit scoring models change
Scoring models, like computer operating systems, are regularly updated to make improvements.
The vast majority of lending decisions are determined by your base FICO score, a three-digit number from the Fair Isaac Corporation that ranges from 300 (poor) to 850 (excellent). There are various versions for auto lending, credit card decisions and mortgages and there are ongoing score iterations.
The most recent release is FICO 9, which has three major changes: paid off third-party collections won’t carry a negative impact, unpaid medical collections will have less of a negative impact, and rental history (when it’s reported) factors into the score — which can help build your credit.
Another kind of credit score is VantageScore. It’s range used to run from 550 to 900, but it has since been redesigned to run from 300 to 850, just like FICO. This scoring model places more emphasis on the past 24 months, which can favor those with shorter credit histories.
It’s latest version, VantageScore 4.0, is rolling out in the fall and aims to account for sporadic users of credit who can get dinged on their score when they aren’t actively using their credit.
These score models are then used by the three major credit bureaus, Equifax, Experian and TransUnion.
3. Not every part of your score is equal
Lenders may use different scores to emphasize high risks for their industry. This is the breakdown of how a FICO score, the most commonly used credit score, is calculated. You can compare the weights it places on certain parts of your credit history with other scores that may emphasize different things.
Payment history — 35% Impact: The biggest factor in your credit score is how reliably you pay off debt. This monitors your payments of both revolving credit like credit cards and installment loans like a car loan. Action: One of the best things you can do to keep your credit score up is make regular payments on time.
Amounts Owed — 30% Impact: The next most important part of your credit score is how you use your credit. Someone with a $5,000 credit card limit who makes purchases and pays them off monthly will be using less of their available credit than someone with the same credit limit who has a $4,000 balance. The first person has a lower “credit utilization ratio” and therefore is a better bet for lenders, resulting in a higher score. Action: To keep your score up, maintain low credit card balances.
Length of credit history — 15% Impact: People with longer track records of making timely payments and having open accounts are a better bet for lenders. This can ding younger people and newer users of credit, a challenge some scoring models aim to account for. Action: To build credit, start with a secured credit card, get a co-signer on a loan or card or become an additional user on someone else’s credit card.
Credit mix — 10% Impact: This isn’t a big factor, but in the absence of other information, your score can be evaluated by the combination of credit cards, retail cards, installment loans or mortgages you hold. Action: Don’t open new accounts just to have a better mix, it won’t improve your score.
New credit — 10% Impact: The more new accounts you open in a shorter amount of time will put you in a higher risk category — especially those with short credit history — and lower your score. Action: Don’t set out to “build credit” by applying for a bunch of cards all at once. It will factor in negatively to your credit score.
Use this FICO credit score estimator to walk through the steps of how your score is built.