Did you know that you don’t just have one credit score? You actually have many different credit scores!
A credit score is a three-digit number between 300-850 that represents your creditworthiness. Lenders look at credit scores to help them make a decision about offering credit. The higher the number, the more creditworthy a borrower appears. Credit scores are based on credit history which includes number of open accounts, total debt, repayment history, and other stats.
So how does it work? Credit scores are based on data collected by credit bureaus and the way that data is scored by credit scoring firms.
There are three major credit bureaus that collect your credit information: Experian, Equifax, and TransUnion. Each of these gather your information independently, and not all lenders report information to all three bureaus, which means there can be variations in data among the agencies. Credit scoring firms then use the data collected by credit bureaus to come up with a score.
FICO is the most used credit scoring firm, with 90% of major lenders using their scores. VantageScore is FICO’s competitor and is not used as often. Both use data from the same credit bureaus, but they apply different algorithms to come up with their own scores. The FICO scoring model values your payment history as the biggest piece that affects your credit score while the VantageScore model establishes credit card balances and credit utilization as the heaviest factors. Both firms frequently update their models to stay keep their scores accurate and relevant.
Another kind of credit score is what you’re shown when you find your credit score on free credit report websites. This is known as an “educational” credit score and is mostly used for informational purposes only. Typically, these kinds of scores come from VantageScore.
Since there can be different FICO and VantageScore scores depending on which bureau’s data was used (Experian, Equifax, or TransUnion), it’s hard to be sure which credit score your lender will see. On top of this, some lenders even use their own versions of the scores. So, it’s a good idea to keep an eye on your credit score and practice good credit habits, like paying your bills on time, to raise your score.
Your credit score can make a big difference in the money you’ll spend for financing. A higher credit score may lower your interest rates, so make sure to keep an eye on it. If you have more questions about how credit scores work or how you can get home financing that meets your needs, contact us today. One of our experienced and helpful Loan Originators will be happy to walk you through the mortgage process.
Sources: Bankrate, Investopedia
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