Chris O'SheaWhat is a Credit Score?
What is a Credit Report?
Do only banks and lenders use credit scores?
Is credit score the only thing used by lenders for loan approval?
What is VantageScore?
What does a good VantageScore credit score mean to me?
What is the range of credit scores with VantageScore?
What influences my VantageScore credit score?
What factors really count on my VantageScore credit score?
Do race, age and other, non-credit related factors affect my VantageScore credit score?
If I leave a balance on a credit card each month, will I build a credit score faster than paying the card in full each month?
Are charge cards treated the same as credit cards by credit scoring models?
If I close my credit card accounts can I improve my credit score?
Will reductions in my credit card balances hurt my VantageScore credit score?
Is Medical debt a factor in my VantageScore credit score?
Will my VantageScore credit score be higher the more loans I have?
Does shopping for a loan hurt my VantageScore credit score?
I’ve always heard that the fewer credit cards I have, the higher my score. Is this true?
If I have a credit balance on my cards, will my VantageScore credit score improve?
As soon as I pay off my credit card debt, will my VantageScore credit score get better?
If I leave a balance on my credit card will it help me build credit more quickly than paying it in full each month?
When I close a credit card or pay off a loan, do I lose the value of the account’s age in my credit score?
When I close a credit card account, will my credit scores always go down?
If I pay off loans or close credit cards, will it cause their removal from my credit reports?
If I don’t have a long credit history, can I still get a VantageScore credit score?
How do I improve my Credit Score?
How can I see what is in my Credit Report?
How do I correct my Credit Report if I think there is an error?
Why don’t my free credit reports include credit scores?
What is a Credit Score?
A credit score is a three-digit number (derived using a mathematical formula) from all the information in your credit report. That mathematical formula is called a credit scoring model which attempts to measure the likelihood that you may default on a loan payment, which is defined as being more than 90 days “past due.” These models:
- Analyze various credit behaviors, such as how regularly you pay your bills on time
- Compare your behavior with other borrowers to assess how likely you are to make timely loan repayments.
- Each company uses its own formulas for calculating credit scores. The differences in the formulas may lead to differences in your credit scores.
- Companies may produce scores that give results on different scales.
- Creditors or lender reports don’t always report to every Credit Reporting Company (CRC). This means that information that the credit reporting companies plug into their formulas may differ from credit reporting company to credit reporting company.
Not all credit scores will be the same, nor will they remain the same. Credit scores may differ from one source to the next because different lenders use different credit scoring models. There are a few reasons for this:
There are roughly 220 million consumers with credit files in the United States, and approximately 36 billion pieces of credit data are recorded on their combined credit files every year. That averages out to more than 15 changes to each consumer’s credit file every month. The impact that the information in your credit files has on your credit scores changes over time as well.
For more information visit:
http://www.consumerfinance.gov/askcfpb/315/what-is-my-credit-score.html
What is a Credit Report?
Credit reports, also known as credit files, are composed of the credit-related data a credit reporting company has gathered about consumers from different sources. Credit reports include records of mortgage payments, credit card balances, credit card payments, auto loan payments and credit inquiries. It may also include public records, such as tax liens and other information from government sources.
Credit reports may include:
- A list of companies that have given you credit or loans
- The total amount for each loan or credit limit for each credit card
- How often you paid your credit or loans on time, and the amount you paid
- Companies that have asked to see your credit report within a certain time period
- Your address(es) and/or employers
- Other details of public record
Credit reports may also include:
Under Federal law, you are entitled to receive one free copy of your credit report from each credit reporting company every 12 months. You can obtain a free copy of your credit reports at https://www.annualcreditreport.com or by calling 1-877-322-8228. For more information visit http://www.consumerfinance.gov/askcfpb/309/what-is-a-credit-report.html.
Do only banks and lenders use credit scores?
Any institution that lends money – credit unions, banks, credit card companies, financing companies, and mortgage lenders, just to name a few – can use a VantageScore credit score to help them assess the likelihood that you will become more than 90 days late on the payment of a loan. These institutions are likely to use your credit score along with other information unrelated to your credit score that they have obtained directly from you, such as whether you’re working, your work history, how much you earn and your planned down payment. In general, borrowers with higher scores can get more credit – at more more competitive rates.
Lenders aren’t the only ones who may use your credit score. Insurance carriers use credit scores to help predict losses, and to accurately price homeowners and automobile insurance policies. Other companies may check your credit score, too. For example:
Is credit score the only thing used by lenders for loan approval?
No, a credit score is just one part of a number of factors that lenders examine in a process called “underwriting.” Underwriting is the analysis and decisioning process used to evaluate a credit application. Underwriting criteria vary and are driven by a lender’s business. Among the criteria beyond credit scores that a lender may consider are:
- Down payment
- Income
- Employment history
- Cash on hand
What is VantageScore?
VantageScore was founded by the 3 leading credit reporting companies – Experian, Equifax and TransUnion. The credit score model was developed by a representative team of statisticians, analysts and credit data experts from each of the credit reporting companies, and is used by hundreds of institutions, including credit unions, banks, credit card issuers and mortgage lenders.
The VantageScore 3.0 model was later developed using approximately 45 million anonymous credit files. Data, which was pulled equally from the three credit reporting companies, included public record information, collections information, trade line data, and inquiries. Your VantageScore 3.0 credit score is calculated on a scale of 300-850.
What does a good VantageScore credit score mean to me?
A good score may mean you have easier access to more credit, possibly even at lower rates. The consumer benefits of a good credit score go beyond the obvious. For example, underwriting processes that use credit scores allow consumers to obtain credit much more quickly than in the past.
What is the range of credit scores with VantageScore?
The VantageScore 3.0 model will range from 300 to 850 – a numerical scale that is more commonly used by other credit scoring models. Higher scores indicate to lenders that you’re a less risky borrower, while lower scores indicate that you’re an increased risk.
What influences my VantageScore credit score?
How many credit accounts you have, how much have you borrowed, and how promptly have you made your required payments affects your score. These and other key factors influence your credit report, and ultimately your VantageScore credit score. This chart illustrates the impact certain actions have on your credit score:
What factors really count on my VantageScore credit score?
Of course, not all factors have the same impact on your VantageScore credit score. In general, here’s how much each one matters. (If one of these categories doesn’t apply to you, the other categories would be adjusted accordingly).
Do race, age and other, non-credit related factors affect my VantageScore credit score?
One of the most important misperceptions about credit scores is what information the VantageScore model, or any credit scoring model for that matter, is NOT used. The VantageScore model does not consider: Race, color, religion, nationality, sex, marital status, age, salary, occupation, title, employer, employment history, where you live or where you shop.
If I leave a balance on a credit card each month, will I build a credit score faster than paying the card in full each month?
You will not build a solid credit score any faster by carrying a balance than you would if you paid your credit card balance in full each month.
The speed at which you build a credit score is largely based on the age of a credit card account, not whether or not you carry a balance. A credit card opened 12 months ago is a one-year-old credit card, regardless of your payoff or balance rollover practices. Additionally, carrying a balance on a credit card each month means you’ll incur interest charges.
The best way to build a solid credit score is to manage all of your accounts properly. Best practices include paying all of your credit obligations on time every month, applying for credit only when needed, and keeping balances on credit cards as low as you possibly can, if you cannot pay them in full each month.
Are charge cards treated the same as credit cards by credit scoring models?
The credit obligation associated with a charge card is similar to, but not the same as, a credit card obligation. As such, there are subtle differences in how they’re considered by credit scores.
A charge card is different than a credit card in that the balance is due in full each month, while credit card balances can be carried, or “revolved,” month to month. Charge cards do not have published credit limits, where credit cards do.
Charge card accounts factor into credit scores, but they are not used by the VantageScore credit scoring model for calculating various “balance to credit limit” measurements, because of the lack of a credit limit.
If I close my credit card accounts can I improve my credit score?
Closing credit cards does nothing to improve your credit scores and, in fact, can backfire and leave you with lower scores.
When you close a credit card account, you lose the value of that card’s credit limit in the credit score calculation. The credit limit is an important component when determining a consumer’s “balance to limit” ratio. The balance to limit ratio measurement rewards consumers who have low credit card balances relative to their credit limits.
If you close credit cards, especially those with large credit limits, you will likely cause your balance to limit ratio to go up. This can cause your score to go down, and down considerably in some extreme instances.
Additionally, if you close credit card accounts the credit bureaus will eventually remove them from your credit reports. Even though it can take years for an account to be removed from your credit reports, once it is gone you will get no benefit from your responsible management of that account.
Will reductions in my credit card balances hurt my VantageScore credit score?
Credit scores are determined by a credit report. Credit reports are by nature a reflection of an individual’s full credit activity. Accordingly, there are potentially countless “scenarios” in terms of the impact a cancelled card or credit reduction would have on someone’s score.
As a very broad and generalized example, the impact is different and less severe on someone with many “trades” (i.e. mortgage, auto loan, home equity, multiple cards, etc.), than on a consumer with a thinner file. So if you have a robust credit file, losing a credit card with a high balance could possibly result in a 20-30 point reduction in your VantageScore credit score, but that reduction could disappear rather quickly. For thinner file consumers, the impact would be greater and likely last longer.
If your score is already low, in other words impacted by late payments, etc., then the reduction in the credit score will be less from a closed card due to the fact that late payments have a much greater impact.
Is Medical debt a factor in my VantageScore credit score?
Medical debts are not considered in any format if reported directly from a medical facility. When a medical debt has entered a third-party collection agency, the VantageScore model will consider it because it is classified as a collections account. Paid medical collections will not factor into your VantageScore credit score.
Will my VantageScore credit score be higher the more loans I have?
It’s not the amount of loans that generates a good score – it’s how current a borrower keeps them and many other factors such as credit utilization, and the age of loan accounts. In other words, your score can be impacted positively by taking out only a certain number of sensible loans, and keeping them in good standing without missing payments.
Does shopping for a loan hurt my VantageScore credit score?
Consumers are encouraged to shop for the best loan rates and conditions. Accordingly, the VantageScore model does not penalize multiple inquiries made within a short period of time. When several inquiries are made within a shortened timeframe, it is assumed that the consumer is shopping around for a rate and not opening up multiple lines of credit.
The VantageScore model uses a 14-day rolling window in which all credit inquiries are de-duplicated. All inquiries within that window are considered one inquiry regardless of the type of account. So regardless of whether the credit inquiry is made in response to a mortgage, auto or bank credit card application, it will be counted only once during that 14-day window.
I’ve always heard that the fewer credit cards I have, the higher my score. Is this true?
Credit reports are a reflection of an individual’s credit activity. Accordingly, there are potentially countless scenarios where the number of credit cards owned may impact your credit score. Prudent handling of your personal finances is the best way to manage debts. Therefore, it is generally a good idea to have a limited number of credit cards for long periods of time that have low balances and are kept in good standing.
If I have a credit balance on my cards, will my VantageScore credit score improve?
If you have a credit balance, it means you don’t owe anything to your credit card lenders and they actually owe you, which is good from a personal financial management standpoint. Credit balance does not positively or negatively impact credit score.
As soon as I pay off my credit card debt, will my VantageScore credit score get better?
The amount of debt you have in relation to the amount of credit you have available is a significant contributor to your credit score; however it is only one of several factors. While your credit card and other loan balances may be low as a result of a recent payment, due to the lenders’ reporting cycles, it may take some time for the payments to be reflected in your credit score. Moreover, available credit and balances are only one of a number of other factors that are considered by credit score models. Improving your credit score can be achieved over time by regularly practicing these sound financial management techniques:
- Pay your bills on time
- Apply for credit only when it’s needed; do not open new accounts frequently or open multiple accounts within a short time span
- Keep your outstanding balances low – a good rule of thumb is not to exceed 30% of your available credit limit with each account
- Pay any delinquent accounts as soon as possible and then keep them current
If I leave a balance on my credit card will it help me build credit more quickly than paying it in full each month?
The balance of an account has no influence over the speed at which you will build or re-build your credit reports or credit scores. A credit card with a $5,000 balance ages just as quickly as a credit card with a $0 balance. Further, even if you pay your balance in full each month there’s no guarantee that the account will show up on your credit reports with a $0 balance. Credit card issuers report your statement balance to the credit reporting agencies. That means even if you pay your balance in full any subsequent use of the card is going to result in a statement balance greater than $0.
One of the most effective ways to build or rebuild your credit is by responsibly managing the accounts that you currently have, or open in the future. Maintaining low balances on credit cards and never missing a payment will lead to better credit scores. However, that certainly doesn’t mean you have to live a debt free life in order to have solid credit. In fact, credit scoring models reward you for a track record of positive credit experience.
When I close a credit card or pay off a loan, do I lose the value of the account’s age in my credit score?
As long as an account is on your credit reports it is considered by credit scoring systems, open or closed and with or without a balance. As such, if you were to close a credit card that was opened 10 years ago it would still be seen and measured as a 10-year old account. And, closed accounts continue to age so an account that was closed 3 years ago is 3 years older today. As such, closing accounts will not result in a reduction in your credit scores as a result of the loss of the value of the account’s age.
When I close a credit card account, will my credit scores always go down?
While it is possible for your credit scores to go down as a result of closing a credit card account, it’s not a definite. The reason your scores could go down would be due to the loss of the credit limit of the newly closed card in your debt-to-credit limit ratio measurements. If you are carrying debt on other credit cards then your debt-to-limit ratio, which is calculated by dividing your aggregate credit card debt by your aggregate credit limits on open credit cards, will likely go up. This can cause your credit scores to go down. However, if you are not carrying debt on other credit cards or the credit limit on the newly closed card was modest enough then the account closure may not result in a change in your debt-to-limit ratio sufficient to result in a score reduction.
If I pay off loans or close credit cards, will it cause their removal from my credit reports?
The credit reporting agencies do not remove accounts once they’ve been closed or paid off. In fact, there is no law requiring the credit reporting agencies to ever remove accounts that are in good standing. At this time, however, the credit reporting agencies choose to remove inactive or closed accounts 10 years after they’ve been closed. Additionally, while closed or paid off accounts are still on your credit reports they are still considered by credit scoring systems.
If I don’t have a long credit history, can I still get a VantageScore credit score?
One of the differentiating factors of the VantageScore model is its ability to score more consumers, which includes those that are new to the credit market, are infrequent users of credit, or have two or less credit accounts.
The VantageScore model will provide a score for consumers who had activity up to two years ago on at least one of the accounts in their file. Many traditional scores limit this review to just six months, allowing the VantageScore model to score people who may have been “out of the credit market” for up to two years. Typically affected are people who use credit infrequently for a variety of reasons, including large ethnic concentrations. Additionally, the VantageScore model will include consumers whose oldest credit account is less than six months old.
How do I improve my Credit Score?
There are several ways to improve your credit score. But it’s much more important to focus on improving what’s in your credit report rather than obsessing over your credit score. Here is some general advice:
- Pay your bills on time. How promptly you pay your bills has the strongest influence on your credit score.
- Apply for credit only when you need it. Do not open too many accounts too frequently. And avoid opening multiple accounts within a short time span.
- Keep your outstanding balances low. A good rule of thumb? Keep balances below 30 percent of the credit limit on any account.
- Reduce your total debt. It is not necessarily bad to owe some money. But it is not good to owe too much money. Consider paying down some of your outstanding loans.
- Build up a credit history. Maintaining a timely payment history for a mix of accounts (e.g., credit cards, auto, mortgage) over a longer period can improve your score.
How can I see what is in my Credit Report?
Not sure about what’s in your credit report? You can receive a free Credit Report from each of the credit reporting companies – Equifax, Experian and TransUnion once a year.
Go to https://www.annualcreditreport.com to receive a free Credit Report.
How do I correct my Credit Report if I think there is an error?
The three national credit reporting companies (CRCs) receive and manage literally billions of pieces of credit use data each year, reported from some 13,000 different sources. The following chart illustrates the immense volume of data regularly flowing in and out of the CRCs.
Given this incredible volume of data provided by lenders to the CRCs, there are times when the information reported about your credit activities may be inaccurate.
If you find information that you believe is not correct on your credit report, contact the company that issued the account or the credit reporting company that issued the report. For more information visit:
http://www.consumerfinance.gov/askcfpb/313/what-should-i-look-for-in-my-credit-report-what-are-a-few-of-the-common-credit-report-errors.html
Why don’t my free credit reports include credit scores?
Your credit report and your credit score are not the same thing. Your credit report is all the information that a credit reporting company has gathered about you. Credit reporting companies calculate your credit score by plugging the information in your credit report into their exclusive credit score formula.
Federal law gives you the right to ask for a copy of your credit report from each nationwide credit reporting company every year for free. However, the law does not require the credit reporting companies to give your credit score for free.
For more information visit http://www.consumerfinance.gov/askcfpb/6/i-got-my-free-credit-reports-but-they-do-not-include-my-credit-scores-can-i-get-my-credit-score-for-free-too.html.
