What is a Credit Score?

Credit scores indicate your level of risk as a borrower. There are different credit scores that use unique formulas but they each will typically include factors such as: payment history and amounts owed. 

What Is a Credit Score?

A credit score is a number that measures how risky you are as a borrower aka your credit worthiness. Financial institutions use this score to measure how much they can trust you. Credit scores are calculated by your past behavior with loans, credit cards, and other financial products. The higher your credit score, the lower risk you pose to lenders. Higher scores usually mean that you can expect better terms and lower rates when you borrow money. 

You might not realize that you have hundreds of of credit scores, not just one. The FICO brand of credit scores used to be the only scoring system3. Established by Fair Isaac Corporation, FICO, remains the main type of credit score used by lenders to evaluate the credit ratings of applicants. When you hear about credit scores, it usually means the FICO Score. However, under the FICO brand there are different types of FICO Scores for different purposes. For example, when applying for a student loan or buying a house, the bank may use a different type of score than if you are applying for a credit card. 

Most recently, the three major credit bureaus (TransUnion, Equifax, and Experian) have banded together to create another scoring system called VantageScore. This score relies on a slightly different set of weighted criteria than FICO Scores. If you receive a free credit score on your credit card statement, you may read the fine print to find out what scoring model and credit bureau data they are using. 

Range of Credit Score

VantageScore 3.0, 4.0, and most FICO Scores range from 300-850. Older versions of VantageScore and some other types of FICO Scores have different numerical values. 

What isn’t In Your Credit Score

Your FICO and VantageScore credit scores only consider your account information on your credit reports. They do not consider things like:

• Your income (credit card companies will ask for this when you apply for new credit, though)

• Your specific place of residence

• Your age, race, gender, religion, marital status, or national origin

• Child support/family support obligations

• Whether or not you’re using credit counseling services

Criteria Used by FICO and VantageScore

FICO and VantageScore determine credit scores by evaluating similar factors that essentially boil down to the following:

• Your payment history

• Amounts owed, particularly versus your overall available credit

• The age of your credit history

• The types of credit accounts opened in your name (loans, credit cards, etc.)

• New/recent applications for credit

It is generally safe to assume that the biggest factor that impacts your credit score is your payment history followed by amounts owed and utilization of credit. 

Exactly how these factors impact a given score can vary, but it’s generally safe to assume that your payment history is the biggest consideration, and that’s nearly always followed by your amounts owed/utilization.

Here is an outline of a few of the more commonly used scoring formulas:

FICO Scoring Criteria

(Scores range from 300 to 850)

• 35% Payment history

• 30% Amounts owed

• 15% Length of credit history

• 10% New credit

• 10% Types of credit

VantageScore 3.0 Scoring Criteria

(Scores range from 300 to 850)

• 40% Payment history

• 20% Credit Utilization

• 11% Balances (total amount owed)

• 21% Depth of credit (length of credit history, types of credit)

• 5% Recent credit

• 3% Available credit

VantageScore 4.0 Scoring Criteria

(Scores range from 300 to 850)

• 41% Payment history

• 20% Credit Utilization

• 20% Age/Mix of Credit

• 11% New Credit

• 6% Balances

• 2% Available credit

Look for our next blog for the break down of these elements included in FICO Scores. 

Twitter Shredded by Credit Karma's Comically Inaccurate Scoring

Last week, Twitter was bombarded with consumers expressing their (hilarious) frustrations concerning their credit scores provided by Credit Karma, the personal finance company owned by Intuit. 

The frustration comes from users realizing that Credit Karma is providing them with lower credit scores than what is found on their credit reports. 

Consumers were tweeting about applying for credit cards, loans, and attempting to purchase vehicles thinking that they had good or excellent credit, only to find out that the credit score that the issuer pulled was lower than what they had found on Credit Karma. The tweet that started the meme trend can be found here.  

Twitter users were quick to share and create memes about how their credit score was inflated on Credit Karma. @RiotGrlErin had even tweeted “checking your credit score on credit karma is like checking your symptoms on WebMd.”

But, users were on to something important when it comes to checking your credit score. There are many reasons why your credit scores differ between what a personal finance website tells you and what lenders or credit card companies find. There are mainly two reasons: For one, a lender may pull your credit from different credit bureaus, either Equifax, Experian, or TransUnion. Your score can differ depending on which bureau your report is pulled from, since they do not all receive the same information about your credit accounts. Secondly, there are different credit score models and versions that exist across the board. 

Credit Karma’s website states that they use the VantageScore® 3.0 model. VantageScore may look at the same facts that the other popular FICO scoring models does, such as your payment history, amounts owed, length of credit history, new credit and your credit mix but each scoring model weighs these factors differently. Because of this, VantageScore and FICO Scores tend to vary from one another. The VantageScore® 3.0 on Credit Karma will likely be different from your FICO Score that lenders use most often. If you are planning on applying for credit, make sure to check your FICO score since there is a good chance that lenders will use this to determine your creditworthiness. FICO Scores are used in over 90% of U.S. lending decisions. It is important to note that there are also industry-specific FICO Scores to look at when you are planning a specific purchase. For example FICO® Auto Scores are ideal if you are wanting to finance a car with an auto loan. If you are planning to buy a house you should look at FICO® Scores 2, 5 and 4. 

The best way to look at your scores is to visit www.annualcreditreport.com where you can access and download your reports from Equifax, Experian, and Trans Union. Due to Covid, your report is free to access once a week until April 2021. 

Feel free to shoot us a message for any questions!

Drastically Dropping Credit Score

Many people are are wondering why their credit scores are dropping at a drastic rate. You may be doing things such as paying off auto loans, credit cards, and even making credit card payments well above the minimum due. So, this drop seems really unfair, doesn’t it?

You first want to retrieve your credit reports from the three main bureaus: Equifax, TransUnion, and Experian. You can obtain and download these reports from: AnnualCreditReport.com  These reports are now available weekly, for free until April 2021! Every month millions of data are retrieved by credit bureaus to be posted. The items in your report should be accurate but sometimes errors can be found. You should check for things such as: a misspelled name, a mixed-up account in the lenders’ records, a suffix such as “junior” that should be “senior” and other items that could be a mix up with someone else’s data on your report. By getting all three reports you will be able to see the discrepancies faster.

The bureaus do not have all the same information. They compete for business both into and out of their files. Some lenders may only be reporting to one of the lenders and you may find that you have very different credit scores from each reporting agency. Make sure to dispute anything that you do not recognize as yours, that is more than seven years old, or if something is missing. The best way to dispute is by sending them a letter through certified mail, so that you know an actual person is reading your dispute and you can verify that they received your letter. Since they are in competition with each other, if that data is incorrect, that is not a good competitive business for you. 

High Balances

If you are making the above minimum payment on a number of cards which you are carrying balances, the interest being charged is making your balance go up which is causing you to lose points.  You should be keeping your credit card balances below 30% of your credit limit. If you have multiple cards, don’t focus on just paying off one. The card with a high balance will still effect your credit score regardless if they other(s) are paid off. 

Accounts not appearing on report

Some lenders don’t report to every bureau every month. It costs the lender money to report to the bureaus that you have paid a bill. Auto lenders are quick to repossess a vehicle if you miss a payment but might find little advantage in reporting the paid-off loan instantly. It may take a three-month period for that good news to get published! It’s unfair! 

Closed Credit Card Accounts 

If you have paid off credit cards and then closed the accounts, the utilization points in your score will have gone down because you have lost the available credit from those cards. This is a reason why it is important to not close accounts if you can prevent from doing so. Your credit limits are tied directly to your credit utilization ratio, which counts for 30% of your overall FICO score. You should try to keep credit cards open, whether you are using them or not, unless you are being charged a large fee for their use. One tip I can suggest: If you have two cards from the same bank issuer, you should ask to have the closed account credit limit added to your remaining opening account. This will keep the utilization factor low while saving you an annual fee. 

Your credit history has gotten shorter

If you have recently closed any other accounts, it could have impacted your credit history. Your credit history is how long you have had credit being reported in your name. In credit reporting, the older the better. This makes it more difficult for young people to build up their scores. It is useful to know that some scoring models only count your open accounts in this calculation. 

What affects your credit score?

Here is a brief FICO score primer:

The five basic components in order of importance:

• Payment history (35 percent)

• Credit utilization (30 percent)

• Length of credit history (15 percent)

• Credit mix (10 percent)

• New credit (10 percent)

Credit mix

While the car payments aren’t a factor in utilization, they have a direct impact on the credit mix portion of your score. Lenders like to see that borrowers can handle both revolving credit (credit cards, etc.) and installment debt (car notes, mortgages, etc.) on a monthly basis. Once your car notes were paid off, you lost those points. You still have your good payment history on those notes and that history will stay on your credit reports for 10 years. But credit cards alone will not do much for you in the credit mix department.

New credit

Having hard inquiries over the past couple of years could negatively impact your credit score but only in short term. If you have applied for credit that you did not receive that will hurt you since you would not have the new available credit credit to balance out the impact of that inquiry. It is important to have a fairly good idea that you will be accepted for credit before you apply. 

If you have questions or concerns about your credit report use our online form to contact us. We can answer your questions and see if you might have a case. 

Tips for Boosting your Credit Score before Applying for a New Apartment

When getting a new apartment, you are required to do a lot of paper work. Luckily, most apartment applications occur online, especially since the onset of the coronavirus pandemic. Landlords and property management companies will still ask that you provide personal information so that they can conduct a thorough credit and background check. 

Different states, cities, and apartment complexes will have different requirement, but most rental applications will request similar information for each applicant, so that they can verify your identity and your ability to pay rent. This typically includes information such as: personal contact information, social security number, current and previous addresses, employer information with proof of income, emergency contacts, and vehicle information. 

Even though it is all basic information, rental applications can still be extensive. Once everything checks out - meaning you have a clean criminal record, a good rental history with no evictions, and have proof that you can afford your new place - a new home will await for you on the other side. 

To help you obtain a new home here are a few wats you can manage and maintain your credit score to amaze your potential landlord:

Know what is on your credit report ahead of time

It is reassuring to know what your prospective landlord will be seeing when they run a credit check. Before your apartment hunt visit AnnualCreditReport.com and download your free credit report from each of the three main credit bureaus: Experian, Equifax, and TransUnion. You can download your credit report weekly for free through April 2021. (This is typically annually)

Once you download your reports, it is vital that you review them carefully. If you have student loans, or any other credit balances, it should come as a surprise to find them on your report. You will also be able to see your credit score. 

You want to look out for negative marks that you may not have known about. If you see something that is inaccurate or an error, make sure you dispute the errors right away. It is better to send a letter by certified mail rather than using their system so that you have the comfort of knowing a real person is looking into the issue and you can verify that they received the dispute.

Improve Your Credit Score

The best way to prime your credit score, is to first know how it is calculated. The most popular is the FICO score model that looks at five key factors:

• Payment History (35%): Whether you have paid past credit accounts on time. 

• Amounts Owed (30%): The total amount of credit and loans you are using compared to your total credit limit, aka your utilization rate.

• Length of Credit History (15%): The length of time you have had credit. 

• New Credit (10%): How often you apply for an open new accounts. 

• Credit Mix (10%): The variety of credit products you have, including credit cards, installment loans, finance company accounts, mortgage loans, etc. 

To boost your credit score quicker, pay off as much credit card debt as soon as possible without completely draining your cash reserves. Do this more than 30 days before you apply so that your credit score can refresh. 

Finances

You will be asked to provide proof of income when you apply for your new apartment, which is typically your pay stubs and/or tax returns. In addition you should also be prepared to provide statements for both your checking and savings accounts. It is always good to make sure you have proof that you have savings set aside for your security deposit and incidentals like facility fees, parking fees, and maintenance fees. 

 Be Weary of New Credit Inquires

If you can avoid it, don’t apply for any new credit cars, auto loans, or any other kinds of credit products right before you apply. When a lender performs a credit check, it leads to a “hard inquiry” into your credit history. Hard inquiries appear on your credit reports that are pulled by the lender and may results in a temporary decrease in your credit score. While the decrease is usually insignificant, around five points, it can send red flags to the potential landlord. 

Build Up Your Savings

Before moving into your new place, prepare for your increased cost of living. If you have the ability to live rent-free with a family member, take advantage! Every month, or even better, every week, set aside what money you would be spending on rent. After a few months you will build up a nice emergency fund. 

These are just a few helpful tips to get you ready for your move! If you are denied, check over your report for inaccuracies. If you need help, contact us for a free consultation