To win any game in life, you have to know the rules. It’s no different with your credit score. There’s a lot of misinformation out there. And when it comes to your credit score, bad information can be very dangerous. Here are five of the most important credit facts you have to know to build your credit score and “win” the credit game.
1. Your score will be different for the three credit reporting companies
The three credit reporting companies (Experian, TransUnion, Equifax) may all use the same data to calculate your FICO score, but each company uses its own slightly different version of the FICO formula. That’s why the sores are not all exactly the same.
The three credit reporting companies are for-profit businesses that make their money by selling your credit information to other companies. Every time you apply for credit or a loan, that company has to pay one of the credit reporting companies a fee to access your credit score and report.
Since the Experian, TransUnion, and Equifax are all in competition with one another for what is basically the same product, they have to “invent” ways to be better than one another. One way they do this is by making alterations to the basic FICO formula and then trying to convince lenders that their formula is the “best”.
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2. Not everyone uses the same score to make lending decisions
Lenders can choose which credit reporting company they buy scores from, but it goes beyond that. Each credit bureau also sell specialty credit scores to mortgage lenders, auto lenders, and other specific industries. These scores may include other data (like utility payment history for housing related financing) or put heavier emphasis on some factors than others (like auto loan history when applying for a new auto loan).
FICO scored are used in approximately 90% of lending decisions in the United States, but there are other scoring models out there, like VantageScore and Beacon. But, these various scoring models still all use the data on your credit report to make calculations.
So… if you pay attention to the key factors that affect your standard FICO score, you will score well no matter what model a particular lender uses.
3. Checking your own credit report or purchasing your credit score do not ding your credit
You are allowed to check your own credit as often as you like without causing any damage to your scores. You are allowed 1 free copy of each major report every year. If you stagger your requests out correctly, you can check your credit report for errors three times a year for the rest of your life without paying a penny to do so.
If you want to see a credit score, you may have to pay for it. Your score is not part of your free credit report. Some credit card companies will print a credit score on your statements. These scores are pretty accurate and are a good (free!) way to keep an eye on your score.
Popular free online credit score services are not a very good place to monitor your scores. They tend to be less accurate overall, and their main purpose for existence is to lure in as many people as possible so they can sell ad space to companies who want to offer you credit cards and loans.
The most reliable way to monitor your actual credit score is to enroll in the credit monitoring service offered by one of the three credit reporting companies. You may have to pay $15 bucks a month (or more) but it is worth the peace of mind, especially if you suspect identity theft or are working hard to reach a specific credit score goal.
4. Opening any new line of credit will ding your credit
Actually, just applying for a line of credit, even if you do not accept it, can lower your score.
When you apply for credit, you authorize what is called a “hard inquiry” on your credit file. That alerts all lenders that you are actively seeking new credit. If you apply for too many accounts at once, you will look like a risky borrower and your credit score will drop.
What if you are rate shopping for a mortgage or auto loan? Concentrate all your inquiries into a 4-week period. When the FICO scoring model sees that you have 7 hard inquiries for mortgages all packed into a short period of time, it recognizes it as “rate shopping” and will not penalize you for the extra activity.
But, if you apply for 2 credit cards, a car loan, and a line of credit at a furniture store all in 4 weeks – expect a sizable drop in your score. Too much credit at once is a bad thing because it lenders think you will quickly overextend yourself.
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5. You have more control over your credit score than you probably realize.
One of the key factors used in calculating your credit score is your Utilization Ratio, accounting for a full 30% of your FICO score. In other words, this measures how “maxed out” your accounts are. If all your credit cards have high balances and you have a new auto loan that you just started paying on, you will have trouble in this area. But, if you take the steps necessary to pay down those credit card balances, and pay all your car payments on time, your score will improve nicely.
FICO recommends you keep your balances down under 1/3 of your credit limit. We see much better results if your balances is around 7% of your limit. Carrying a balance is not bad, just be sure those balances are very low when compared to your credit limit.
Your payment history makes up another 35% of your FICO score. Make a commitment to yourself right now to never make a late payment ever again. Late payments damage your credit significantly. In fact, just one 90-day late payment can have the same effect on your credit score as a 1 or 2 year old bankruptcy!
If you have a troubled credit past, have been a victim of identity theft, or are concerned that there are errors on your credit report, NCES Credit Restoration can have a huge effect on your credit score. Our professionals comb through your credit report, finding errors and inconsistencies that are making your score lower than it should be. We then work one-on-one with you to help you challenge those errors and reverse late payments to “paid as agreed”. (Yes, we really can do that!)
We’ve been educating consumers and negotiating with the credit reporting companies on their behalf for years. We’ve helped thousands of people, just like you, recover form a troubled credit past to build a brighter, more secure financial future.
Find out more about our credit restoration process in this short video.
If you have any questions, please give us a call at 770-952-5168 or contact us online.
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This information is intended for informational and educational purposes only and not as legal advice. If you have concerns about your credit report, harassment, identity theft, illegal collections activity, garnishments, or property liens, you should consult an attorney who specializes in consumer rights and defense.