By Tracy Scott

Understand The Credit Score Basics To Improve Your Financial Health.

Can you explain the difference between a credit history report and a credit score in one sentence? When you’re new to credit, it’s hard to keep credit terminology straight – let alone explain it to someone else. New credit users who understand the basics of credit scores can make smarter credit decisions which can positively affect their financial health for years to come. Apply the knowledge learned here and you might be rewarded with a higher credit score.

What is a Credit Score?

A credit score is a three-digit summary of your credit history report. Lenders and creditors may report your credit activity to one, all or none of the major credit reporting bureaus: Experian, Equifax, and TransUnion. Consequently, your credit score may vary based on which credit history report was used to generate the score.

The most well-known credit scoring agencies are FICO® and VantageScore. Each agency uses a proprietary algorithm to generate the score based on information detailed in your credit history report. While the exact credit scoring formula is unknown to the public, each agency has confirmed which credit behaviors influence credit scores.

What Makes Up Your Credit Score?

Credit scoring calculations are a snapshot of your credit behavior and often change as new information is added to your credit history report. Factors that influence your credit score may vary by agency and scoring model used, but each uses similar criteria to assign a score:

• Payment History
• Available Credit
• Length of Credit History
• New Credit Accounts
• Variety of Credit Accounts

FICO provides a specific percentage breakdown for each criteria while VantageScore does not. However, both agencies agree that paying your bills on time has the most significant influence on your credit score.

Who Wants to Know My Credit Score?

Lenders and creditors want assurance they will be repaid on time and in full, so they turn to credit scoring agencies to help them simplify the task of assessing the risk of extending credit. Your credit score influences credit approvals, denials, credit line increases, in addition to helping establish interest rates on credit cards and loans.

Credit scores are often used, along with employment history and household income, when making a credit decision. The underwriting and approval policies of the creditor will determine how much weight credit scores are given in any situation.
Higher credit scores are interpreted as a low likelihood of defaulting on repayment obligations. Consumers are often amazed to learn that their credit history report can also be used by landlords, utility companies, and cell phone companies before they decide to enter into a business relationship with you.

What is a Good Credit Score?

What qualifies as a “good credit score” can vary based on the scoring model used and the credit scoring agency providing the score. Experian, one of the major credit reporting bureaus, states that a good VantageScore is one that is at least 700 if using a scoring range of 300 – 850. Alternatively, a good FICO score is 670 using the same scoring range. In both cases, what’s considered a good score could also vary by lender. In all instances, the higher the score, the better.

How Can I Increase My Credit Score?

Two of the best ways to build good credit is to pay your bills on time and keep balances to less than 30% of the available credit limit. But, what if you’re new to credit and you’ve never had a loan or credit card? Starting in 2019, consumers will have two new ways to improve their credit scores.

1) UltraFICO
FICO will allow consumers to use their management of the cash in their checking, savings and money-market accounts as another way for creditors and lenders to assess creditworthiness. As long as you don’t overdraw on your credit union accounts, this new feature should help you build your credit history. Consumers will need to request that the potential creditor pull an UltraFICO Score.

2) FICO 9
You can ask that your landlord report your rent payment history to each of the major credit reporting bureaus: Experian, Equifax, and TransUnion. The newest FICO 9 credit scoring model can factor in rental payment information. Reporting of rent payments to the major credit reporting bureaus is especially helpful for young adults with little or no credit history.

How Do I Check My Credit Score?

The first place to check for your credit score is your monthly credit card or mortgage statement. Some lenders and credit issuers provide scores at no cost to customers. Consumers can also purchase their credit scores from Experian, Equifax or TransUnion.

Your credit behavior determines your credit score. Use credit wisely by paying your bills on time, keeping credit balances low and living within your means. Credit scores aren’t set in stone and can change monthly. When you understand credit basics, you can take meaningful steps to improve your credit score.