Getting familiar with the credit scoring system used in the United States is a daunting task. It’s easy to get wrapped up in minutiae and lose sight of the big-picture questions that could have a major impact on your understanding of the topic.
Here are three questions you probably never considered about your credit score. The answers might surprise you!
1. What are my three credit scores?
When we hear chatter about credit scores on the news or from our friends, usually the talk is about a single, monolithic number. For instance, “My credit score is 700” or “It’s important to have a good credit score.” This leads people to assume that they only have one credit score. In truth, you have three.
That’s because there are three major credit bureaus in the United States: Experian, TransUnion and Equifax. Each receives information about your credit-related behaviors and each creates a report based on that data. Consequently, you have a credit score based on each of these credit reports. When banks are deciding whether or not to lend you, it’s common for them to average the three scores to come up with a comprehensive estimate of your risk as a borrower.
Usually, all three scores are pretty similar, but if one is significantly lower than the others, it could indicate that there’s an error on one of your reports. If you find yourself in this situation, take steps to have it corrected.
2. How are my credit report and credit score related?
The terms “credit report” and “credit score” are often used interchangeably, which causes folks to lose sight of the difference between the two. While it’s true that your credit report and score are related, they’re certainly not the same thing.
Your credit report is a detailed record of your history with handling credit. It lists information about both open and closed accounts, including the types of loans you’ve had and your payment history with each. It also lists recent inquires for credit. Additionally, your credit report might contain data about a past bankruptcy, foreclosure or account that’s gone into collections.
Note: It’s important to remember that the three credit bureaus don’t use a common system for creating consumers’ credit reports. This is partially because each of the credit bureaus includes some information on its report that the others don’t. As a result, the details contained on each of your reports might differ a bit.
On the other hand, your credit score is a numeric representation of the information that’s on your credit report. The three credit bureaus weight each item slightly differently to come up with your score, but generally your payment history and current credit utilization are the two most important factors in determining your score.
3. Besides getting a loan, what else does my credit influence?
You might think that your credit is only important when it comes time to apply for a loan. Besides banks, who else would care about your history with handling borrowed money?
As it turns out, a lot of people care about your credit. It’s viewed as a marker of overall financial responsibility, which is why it plays a role in so many money-related tasks in our lives. For instance, you’ll likely undergo a credit check when you rent an apartment, apply for an insurance policy and set up utilities in your home. Some employers even look at your credit before deciding whether or not to extend a job offer to you.
Because your credit is scrutinized so frequently, it’s important to keep it in good shape. Paying your bills on time and staying out of credit card debt are the easiest ways to build a good score, so make these two behaviors routine.
The bottom line: It’s difficult to become knowledgeable about credit when you’re not asking the right questions. Now you have the facts to move you forward in your journey to credit expertise – be sure to check back often for more tips and tricks!
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