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Understand How Your Credit Score Works



Whether you want to borrow money, open a utility account or rent an apartment, you're asking someone to trust in your ability to pay your bills on time. But lenders and landlords can't call up every one of your credit card issuers since sophomore year and ask whether you're good with money. They're going to pull your credit score.

If your entire financial life could be boiled down to one number, it would be your credit score. It's a three-digit figure that represents your history of borrowing and paying back money. The higher the score, the more trustworthy you're considered to be by creditors.

Although you might scoff at the idea that your borrowing history could be reduced to a single arbitrary number, creditors take it very seriously. A poor credit score could mean paying sky-high interest rates on credit cards and loans (if you're approved at all). You might be asked to pay a deposit upfront to open an electricity or cell phone account. And that dream apartment you applied for? The landlord might hand the keys to a tenant with better credit instead.

On the other hand, having a high credit score means borrowing money at the lowest rates available. You don't have to worry about losing out or paying more because you appear financially irresponsible.

Though they are closely related, a credit report and a credit score are different.

The three major credit bureaus – Experian, Equifax and TransUnion – collect your personal and financial information and compile it all into your credit report. Credit reports detail personally identifying information such as your name, address and Social Security number, as well as open and closed credit card accounts, loans, bills in collections, liens and bankruptcies.

Using the information in your credit reports, credit bureaus will calculate a credit score that is then shared with banks, lenders and other organizations. And yes, because there are multiple credit bureaus, you have more than one credit report and credit score.

Types of Credit Scores

It might seem hard to believe: You have not one, not a few, but dozens of credit scores. However, they're not all created equally.

Data analytics company FICO, short for Fair Isaac Corp., is the biggest and most ubiquitous source of credit scores. FICO produces credit scores for the three credit bureaus based on the information found in your credit reports. Since each bureau collects and reports your information independently, your FICO score will usually differ among them.

"Even under the FICO brand, there are several different models used for different purposes, like for considering a mortgage application versus a credit card application," explains John Ganotis, founder of the website Credit Card Insider. This means you have multiple FICO scores with each of the three bureaus.

Though FICO is the most widely known credit scoring model, it certainly isn't the only one. "A little over a decade ago, the three credit bureaus started a joint venture and created VantageScore, a competing model for FICO scores," says Lyn Alden, as she further notes that VantageScore is now considered another "real" credit score used by lenders – but with less market share than FICO.


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