Q) What does my credit report have to do with my credit score?
Answer: Your credit report is a detailed history of your credit accounts including payment history, credit limit, highest balance ever charged, and age of the account.
Your credit score is a numeric representation of your credit report. Think of your credit report like the report card grade for all the work you did in class a particular year.
Your credit score goes up and down depending on how the information in your credit report changes.
Why You Have Different Credit Scores
If you've ever purchased a three-in-one credit score, you might have noticed that your credit scores are different among the three credit bureaus. As if understanding your credit score wasn't difficult enough, having different credit scores makes it even tougher to understand. Here's why that happens.
Credit bureaus use different credit scoring models
Each of the credit bureaus uses a different model for calculating your credit score.
According to Fool.com, Equifax is the only credit bureau that sells the FICO score to consumers. Equifax uses the term BEACON to refer to the credit score that’s sold to other businesses. The score ranges from 350-850.
Both Experian and TransUnion developed their own credit score calculations based on the FICO scoring model.
The Experian credit score, known as Experian/Fair Isaac Risk Model or PLUS, ranges from 330-830.
The TransUnion score, also known as EMPIRICA, ranges from 300-850.
Credit bureaus have different credit report data
Credit bureaus collect data independently of each other – and they typically don't share it. Not only that, your creditors and lenders might report data only to one or two of the credit bureaus. So, your Equifax, Experian, and TransUnion credit reports might all look different from each other.
Each credit bureau calculates your credit score with the data in its credit file. For example, Experian calculates your credit score with the data in your Experian credit report. So, if you have a collection account that appears on your TransUnion credit report, but not on your Experian credit report, then your TransUnion credit score might be lower.
Which credit score is your lender using?
Lenders usually have established relationships with one or more of the credit bureaus. You can ask your lender from which credit bureau it purchases credit scores (they may or may not tell you), but you typically can't request that your lender use a certain credit bureau to retrieve your score.
Most lenders use the FICO score developed by FICO, the company formerly known as Fair Isaac. You can purchase your FICO score based on Equifax and TransUnion credit reports from myFICO.com. Unfortunately, consumers are no longer able to purchase Experian-based FICO scores. Lenders may still use the Experian-FICO scores.
FICO, FAKO, Credit - What Are All These Credit Scores?
The lingo used to talk about credit scores can be confusing. On any given personal finance website or in any given book, you might see the term credit score. Or you might see FICO score. Still, there's another credit score term that's been thrown around - FAKO score. What are all these different scores and what do they mean? Which one is the "right" one?
Credit Score is Generic
Let's start at the beginning. Think of "credit score" as a generic term that used to refer to the numeric value given to your credit history. Your credit score is calculated using information contained in your credit report.
You may have also heard about the Vantage Score, a newer score developed by the three major credit bureaus, that also considers non-traditional forms of debt like apartment leases and utility payments.
FICO is a Brand
The FICO score is a branded credit score, developed and administered by a company called Fair Isaac.
For the analogical-minded - credit score is to FICO as bandage is to Band-Aid.
What about FAKO?
FAKO score is used to refer to any credit score that's not a FICO score. If you purchased your credit score from anywhere but myfico.com, then it's a FAKO score.
What's the Difference?
As far as we know, all the credit scores are generally calculated the same. Since we can't see each company's exact formula, it's hard to pinpoint the specific differences.
Creditors and lenders use the credit score from the company they have a business relationship with. It could be a credit bureau's credit score, the FICO score, or the lender's own credit score. The only way to find out is to have your lender tell you (some won't).
15 Things That Hurt Your Credit Score
Your credit score is an important number. It's how creditor and lenders quickly decide if you are creditworthy. Find out which actions hurt your credit score so you can stay away from them.
1. Paying late
Thirty-five percent of your credit score is your payment history. Consistently being late on your credit card payments will hurt your credit score. Pay your credit card bills on time to preserve your credit score.
2. Not paying at all
Completely ignoring your credit cards bills is much worse than paying late. Each month you miss a credit card payment, you're one month closer to having the account charged off.
3. Having an account charged off
When creditors think you're not going to pay your credit card bills at all, they charge off your account. This account status is one of the worst things for your credit score.
4. Having an account sent to collections
Creditors often use third-party debt collectors to try to collect payment from you. Creditors might send your account to collections before or after charging it off. A collection status shows that the creditor gave up trying to get payment from you and hired someone else to do it.
5. Defaulting on a loan
Loan defaults are similar to credit card charge-offs. A default shows that you have not fulfilled your end of the loan contract.
6. Filing bankruptcy
Bankruptcy will devastate your credit score. It's a good idea to seek alternatives, like consumer credit counseling, before filing bankruptcy.
7. Having your home foreclosed
Getting behind on your mortgage payments will lead your lender to foreclose on your home. In turn, the late payments will hurt your credit score and make it harder to get approved for future mortgage loans.
8. Getting a judgment
A judgment shows you not only avoided your bills, the court had to get involved to make you pay the debt. While they both hurt your credit score, a paid judgment is better than an unpaid one.
9. High credit card balances
The second most important part of your credit score is level of debt, measured by credit utilization. Having high credit card balances (relative to your credit limit) increases your credit utilization and decreases your credit score.
10. Maxed out credit cards
Maxed out and over-the-limit credit card balances make your credit utilization 100%. This is least ideal for your credit score.
Q) How Will Debt Settlement Affect My Credit Score?
Answer: It's hard to predict just how many credit score points you'll lose due to debt settlement, but we do know that debt settlement hurts your credit score.
FICO released FICO score loss information based on two hypothetical situations. In the scenario, the person with 680 credit score (who already had one late payment on the credit card) would lose between 45 and 65 points after debt settlement for one credit card, while the person with the 780 credit score (with no other late payments) would lose between 140 and 160 points.
Your credit score might experience a similar drop if you have a credit profile similar to these scenarios. See How Credit Mistakes Hurt Your FICO Score for more information.
Debt settlement will hurt your credit score more if the credit cards you settle are already in good standing and if you end up settling multiple credit card accounts. Debt settlement information will remain on your credit report for seven years, but will have less of an impact on your credit score the older the information gets.
You can better predict the impact of a late payment on your credit score using the FICO Score Simulator, available when you purchase the FICO Standard product from myFICO.com. FICO Standard includes your Equifax or TransUnion credit report and credit score.
How To Improve Your Credit Scores
Techniques for Better Credit Reports and Scores
Lenders analyze your credit scores to determine whether or not to approve a home mortage, a car purchase and nearly all other types of loans.
Before lending you money, creditors want to determine how much of a risk you are—in other words, how likely you are to repay the money they loan you. Credit scores help them do that, and the higher your score, the less risk they feel you'll be.
Most increases to your credit scores take place over time and require an ongoing effort from you. The only true credit score quick-fixes are to pay down debt and to successfully dispute negative information on a credit report.
Credit scoring software looks at five areas of your credit reports:
Your Payment History
Amounts You Owe
Types of Credit Used
Length of Your Credit History
Your New Credit
The article How Your Credit Score is Calculated explains what's included in each of the five categories.
You can improve your credit scores by taking a close look at your credit reports and charting a plan of action to improve them.
Improve Your Payment History
Always pay your bills on time. Late payments play a major role in driving down your score.
If you have past-due bills now, get current and stay that way.
Contact your creditors as soon as you know you will have a problem paying bills on time. Try to work out a payment arrangement and negotiate with them to keep at least a portion of the late notations off of your credit reports.
If your situation is serious, see a legitimate, non profit credit counselor. Avoid the scam artists who promise a quick reversal of your credit problems.
Keep Debt to a Minimum
Keep your credit card balances low. High debt-to-credit-limit ratios drive your scores down.
Pay off debt, don't move it around. Owing the same amounts, but having fewer open accounts, can lower your score if you max out the accounts involved.
Don't close unused accounts, because zero balance might help your score.
Don't open new accounts that you don't need as a quickie approach to altering your debt-to-credit-limit ratios. That can lower your score.
Length of Your Credit History
Time is the only thing that can improve this aspect of your scores, but you can manage it wisely:
Don't open several new accounts in a short period, especially if your credit history is less than three years. Adding accounts too rapidly sends up a red flag that you might not be able to handle your credit responsibly.
Manage New Credit Wisely
Several credit inquiries during a short period means you are attempting to open multiple new accounts, and that lowers your credit scores.
Credit scoring software usually recognizes when you are shopping for a single loan within a short period of time, such as a home loan. If multiple inquiries are necessary, have them pulled as closely together as possible.
Checking your own credit report does not affect your scores.
Do try to open a few new accounts if you've had credit problems in the past. Pay them on time and don't max out your credit limits.
The Types of Credit You Use
A mixture of credit cards and installment loans, loans with fixed payments, can help raise your score if you manage the credit cards responsibly.
Having many installment loans can lower your scores since payments remain the same until balances are paid in full.
Don't open new accounts just to have several accounts or to attempt a better mix of credit.
Closing an account doesn't remove it from your report. It may still be considered for scoring purposes.
Payment History, A Large Part Of Your Credit Score
Payment history is a big part of your overall credit score. In 2009 changes were made to the way your credit score is calculated, so an occasional late payment won’t hurt you as much as it used to, but you still need to be on guard.
Here’s what you need to know:
A few days late does not count against you. A payment cannot be reported late unless it is thirty days or more past due.
The big picture matters more now. With the older system, one big problem could cause havoc with your credit score. Now, if all other accounts are in good shape, one serious issue will not matter as much.
Small problems hurt less. Previously, if you missed a small bill (less than $100), and it went to collections, you would see a negative impact on your credit score. Now your credit score will not suffer as much from a small misunderstanding.
Q) Will Multiple Loan Applications Hurt My Credit Score?
When you're shopping for a new home or auto loan, you'll probably apply for several loans to get the best interest rate. However, you've been told that several applications for credit hurt your credit score. Does that mean rate shopping will bring your credit score down?
Answer: The short answer is that it depends. If you find your loan within 14 days, your credit score will probably be safe. Depending on the lender, that time could increase to as much as 45 days.
Most credit scoring models have been designed to recognize when a consumer is rate shopping and avoid penalizing them. For example, the most recent FICO score ignores all mortgage or auto loan inquiry made within a 45-day window. Older versions of the FICO score use a 30-day or 14-day window. Once the "window" has passed, loan inquiries are treated as one. Whether (and when) your score will be influenced by rate shopping depends on which credit score your lender is using.
Credit inquiries make up 10% of your credit score. If you have a 700 credit score, that means the penalty for too many inquiries could be as much as 70 points. Just how much the additional loan inquiries hurt your credit score depends on how many other inquiries you have on your credit report.