You’re probably familiar with the importance of credit scores.
Lenders and stores use your credit score(s) to decide whether or not to extend credit to you. They also use them to decide what interest rate to charge you on a loan or credit card, as well as the credit limit. And even whether to require a deposit when opening a new account.
But with all the different credit scores out there, which ones really matter?
By far, the most common credit scores in use today are FICO scores. Credit scoring involves using a mathematical formula to come up with a number (between 300 and 850) based on the information in your credit report. It gives lenders an idea of what kind of credit risk you are.
Roughly 90% of lenders use FICO scores when deciding whether to approve you for a loan, credit card or other credit. In addition, there are FICO score versions specific to different industries. For example, auto lenders use a FICO scoring model designed specifically for them. Credit card companies use other FICO models. So do mortgage lenders.
You can find out your FICO scores (one for each of the major credit reporting companies – Experian, TransUnion and Equifax) by going to myfico.com. The benefit is you’ll get to see a score that‘s comparable to what lenders see. The downside is it costs money. You can get one of your FICO scores and credit report for $19.95. Or you can get all three for $59.85. (We recommend you start with a single report from Experian. We find that they are usually the most complete and accurate among the three.)
If all you want to do is see what is on your credit reports, head on over to annualcreditreport.com. You can download a free copy of the data on one, two, or all three of your credit reports once each year. Check out this article to see how to spread out your downloads to check your reports for free for the rest of your life!
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Where it gets confusing is that other companies have their own versions of credit scores. These are not the same as FICO scores. And most lenders and merchants do not use these scores. Let’s take a look at some of them …
VantageScore. Experian, Equifax, and TransUnion worked together to develop a different credit scoring model called VantageScore. These scores can be accessed directly through Experian’s and TransUnion’s website. However, these scores, which use a different mathematical formula than FICO, are not generally used by lenders.
Educational Scores. A number of personal finance websites offer free credit scores as part of their educational services. Examples include Credit Karma, Credit Sesame and Quizzle. Many of these use the VantageScore model. As above, lenders do not use these credit scores. But they do have some usefulness. They’re somewhat similar to FICO scores, so they can give you an idea of where your credit stands. And tips for how you can improve it.
The Bottom Line
If you’re applying for a loan, credit card or something else where the company will look at your credit scores, they’ll probably check one or more of your FICO scores. In this case, you could look at your FICO scores first, see which one is highest, and then go with the lender that uses the score from that particular credit reporting company. This will maximize your chance of getting approved and getting a good interest rate too.
(Don’t know what credit reporting company your prospective lender uses? Call them and ask! They’ll probably be more than happy to tell you.)
On the other hand, if you’re just working on improving your credit scores, the educational score providers can be a good resource. They’re free. They’ll give you an idea of where you stand. And combined with the information you can get from annualcreditreport.com, you’ll have everything you need to begin building your credit in earnest.
If you would like to learn more about credit scores, join us for our live weekly credit education conference call every Monday evening at 7:30 pm eastern by calling 712-432-0075 and entering pin 678778#.
What do you think? Any comments or questions about credit scores? Tell us your thoughts and ask your questions below.
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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.