Why should you pay attention to your credit score?
Most importantly, your financial well-being is tied to your credit score. When you apply for a student loan, auto loan, or mortgage, lenders will check your score. A good credit score can save you lots of money on interest rates.
Beyond finances, your credit score could come into play in other situations. Landlords may check it when you rent an apartment. Even potential employers may look at your credit score to see if you’re responsible.
In short, your credit score affects your quality of life. It makes sense to understand how they’re scored and how you can improve your standing.
In this article, we’ll discuss major credit bureaus and show you how scores are calculated. We’ll also show you how you can stay on top of your credit score.
Major credit bureaus in the U.S.
Three credit bureaus dominate the industry. They work to collect data about your creditworthiness. Note that these agencies are private companies, but are supervised by the Consumer Financial Protection Bureau (CFPB).
The three major credit bureaus in the U.S. are:
- Equifax: Headquartered in Atlanta, Equifax operates in the US and 23 other countries across the world. Equifax uses VantageScore and FICO scoring models. They also have their own credit score, Equifax Credit Score (this is an educational score).
- Experian: Based in London, Experian operates in 39 countries, giving them a bit bigger scale than Equifax. Experian mainly uses the FICO 8 Score, the most used credit score, and VantageScore. They also have their own scoring model, Experian PLUS (this is an educational score).
- TransUnion: Headquartered in Chicago, TransUnion operates in 33 countries. They’ve been active in the credit reporting industry since the 1960s. TransUnion uses the VantageScore 3.0 model, a tri-bureau model.
A note about VantageScore: The three bureaus collaborated in 2006 to make this tri-bureau credit scoring model. New versions have been released and the model has been gaining market share, though FICO remains the most popular.
Also known as credit reporting agencies, these three companies gather credit-related information from lenders with which you do business. The agencies analyze credit score factors like payment history, total credit utilization, and length of credit history.
Lenders that provide them data could include banks, mortgage companies, credit card issuers, and student loan providers.
Additionally, these major credit bureaus look up state and local court records to see whether you’ve filed for bankruptcy, had a tax lien, been sued, or arrested. Such incidents negatively affect your credit score.
If you're looking at your credit report and see a credit inquiry you believe is incorrect or unauthorized, it's important to take action immediately. Read more about how to remove credit inquiries from your credit report.
Now, what does Equifax, Experian, and TransUnion do with all your information?
Well, when you apply for a loan or credit, the company that’s lending you money wants accurate information on your personal finances. The credit reporting agencies sell your credit report to them, allowing them to analyze your creditworthiness.
Note: Credit bureaus don’t decide your credit line or loan terms and interest rates. The lender does. Your credit report gives them data for determining terms and rates.
Since it costs money to run a credit check on you, some lenders may only look up one score. Major lenders, like banks, will check all three. You should understand this, as scores vary across Equifax, Experian, and TransUnion (more on that below).
Why do credit scores vary among the credit companies?
There are several reasons why credit scores vary.
First, though credit bureaus collect the same type of information, they are separate entities. This means data isn’t consolidated and checked against each other. Moreover, some of your creditors may only report to one or two bureaus, and not all three.
Therefore, data on your credit report can vary across the three major credit bureaus. Typically, differences are small, but you will see different scores because data varies slightly.
Second, timing differences may exist on your credit report. This can lead to one credit bureau having more updated information than another, and thus scores can vary.
Third, as noted above, there are multiple credit scoring models. For example, Fair Isaac Corporation, creator of the FICO scoring model, develops bureau-specific scoring models. While FICO Score 9, the latest version, has one name, it’s customized for each of the three bureaus.
Technically, there are three slightly different FICO scoring models. And that’s why you’ll see slightly different FICO scores with Experian, Equifax, and TransUnion.
FICO Score factors and their percentages
90% of top lenders use FICO scores. You should know how they’re calculated.
The following pie chart shows the FICO credit score factors and their weight in calculating your total score:
As you can see, payment history plays the biggest role, accounting for 35% of your score. Your payment history data shows whether you’ve paid past lenders on time. A few late payments won’t kill your score, but delinquent accounts can have a significant impact.
Amounts owed, which makes up 30% of your score, calculates the types of accounts in which you have balances. It also includes your credit utilization ratio (how much you owe as a percentage of your total credit line). It’s advised to keep your credit utilization ratio below 30%. For instance, if you have credit lines totaling $20,000, keep balances below $6,000.
Length of credit history accounts for 15% of your score. While you don’t have complete control over this, it benefits you to start your credit history as soon as possible. Even if you’re young, you can have a high credit score if you pay your bills on time and keep balances low. And improving your credit score will become easier as time goes on.
Credit mix makes up 10% of your score. If you have various accounts in good standing, such as credit cards and installment loans, your credit score will benefit.
Lastly, new credit accounts for 10% of your score. Don’t open too many accounts within a short period of time, since research shows this poses a risk and could signal you’re not managing money wisely.
FICO score ranges and their quality
FICO scores range from 300 to 850. The higher the score, the better your credit health.
So, what’s a good score?
As Experian notes, a credit score of 670 or higher is considered a good credit score. This chart breaks it down in more detail.
Want to learn more? Read our 10 tips for maintaining a good credit score.
A score below 580 is considered very poor. Within a score in that range, it can be near impossible to get an unsecured credit card or good terms on an installment loan, such as an auto loan. You can work on improving your credit score by getting a secured credit card for bad credit.
With a score between 580-669, you’re considered a subprime borrower. You can probably find lenders that approve you, but your interest rates on credit cards and loans will be higher.
The good credit score range indicates a trustworthy borrow. Only 8% of borrowers with a score of 670–739 are likely to have a seriously delinquent account in the future. Most lenders will provide loans at reasonable rates and terms to those with good credit.
For those with high scores, loans and credit card terms become much more attractive. Those with very good credit get better-than-average interest rates. And those with exceptional credit typically enjoy the best available interest rates.
For consumers with very good or exceptional credit health, savings on interest rates can be enormous. If your score recently increased, you may be eligible for lower loan rates. Getting a debt consolidation loan could help you save on interest while also simplifying your finances.
Knowing where you stand
Improving your credit score begins with knowing your score. Looking at your credit report can show you what steps you can take to boost your credit health.
Here’s the good news: Everyone is entitled to a free copy of their credit report each year. You can see your FICO score from each of the three major credit bureaus. To access that credit report, visit annualcreditreport.com.
You may have other ways to stay updated on your credit score. For example, major credit card issuers and banks, such as Discover and Citibank, offer accounts that come with free credit monitoring. Each month, they’ll update your score so you can stay on top of your finances.
In order to improve your ‘financial health’, you must take control of your credit score. That means educating yourself and monitoring your standing.
If you do that, and practice good financial habits, you’ll slowly improve your credit score and enjoy all the benefits that come with it.