Wondering why you have different credit scores? You are not alone. Your credit score impacts everything in your life: loans, credit cards, mortgages, insurance, apartment leases, employment and maybe even your potential spouse. You should have only one right? In fact, though, you probably have different credit scores. And here are the reasons why.
Credit Score vs. Credit Report
Before we get to the subject of why you have different credit scores, let’s clarify the difference between your credit report and your credit score.
Your credit report contains in addition to your name and social security number a complete review of your credit history:
- the loans you have taken out
- the credit cards you hold
- collections, defaults or bankruptcies
- the name of your employer
- your current and previous addresses
- and a record of inquiries by potential creditors.
The large data breach at Equifax brought a lot of attention to the prevalence of identity theft. But that was not the first nor last incident of data breaches or cases of compromised data. These incidents of security breaches emphasize the importance of protecting your identity. Someone can use your personal data to open accounts in your name and tank your credit score.
It is critically important to get in the habit of routinely checking your credit report. You are entitled to one free credit report from each of the 3 reporting agencies, meaning three times a year you can check your credit report. At the least, you should do it once a year.
Routinely checking your credit report should be a priority in your life.
Your credit score is something different.
Your credit score is a three-digit number based upon all the information that is contained in your credit report.
- Payment history: This is the most important, making up 35% of your credit score.
- Credit utilization: The second most important factor, making up 30% of your credit score.
- Types of credit: Only 10% of your credit score, nevertheless it is helpful to mix up your debt among credit cards, consumer loans, line of credit, and other kinds of financing.
- Length of credit history: This makes up 15% of your credit score. For this reason, it is helpful to keep old accounts open, even if you don’t use them.
- Inquiries: Hard pulls by potential creditors can have a negative impact on your credit score. Even though this category only makes up 10% of your credit score, you should still refrain from applying for many credit cards or loans in a short period of time.
How come you have different credit scores?
All the above seems straightforward and we’ve discussed it before. So why might you have more than one credit score?
There are three credit reporting agencies: Equifax, TransUnion, and Experian. Each of them collects, records and sells data related to your financial behavior and credit history.
While your credit score is going to be similar across all three platforms, there may be small differences. The primary reason for this is because some lenders don’t report to all three bureaus. Further, your creditors may report data to the credit-reporting agencies at different times.
Each credit reporting bureau calculates your score based on the information they have at that time. Depending on when a potential creditor pulls your credit score, it could look different from the score that would be reported by a different bureau.
And, even if all three credit reporting agencies have identical information, received at the same time, they may still produce three different credit scores due to the differences in the system they use to calculate your score. One agency may weigh certain data slightly more or less than the other.
For these reasons, you may have different credit scores. Knowing your credit score ahead of time can help you avoid rejections from creditors. Also, if you know your credit score is not good, you will have some time to prepare a good defense when you apply for your dream job or try to rent the home you love.
The FICO Score
FICO was created in 1989 by the Fair Isaac Corporation, hence the name “FICO.” This was the first time a credit scoring model was used to help lenders make better decisions about whether a potential borrower was a good risk or not. FICO continues to be the most popular credit score model, used by more than 90% of lenders. FICO scores range between 300-850.
VantageScore
The VantageScore was created in 2006 by the three major reporting bureaus as a way to provide more consistent credit scoring. The VantageScore provides lenders with an almost identical assessment of credit risk across all three credit reporting agencies. The range for VantageScore is the same as FICO: 300-850.
FICO and VantageScore use different scoring formulas and they have chosen to keep their algorithms secret. But the data highlighted above form the baseline for their credit scoring calculations.
Bottom line: Don’t become confused by the different credit scores that may be used to establish your creditworthiness. The differences are going to be minimal. The most important thing is to do everything you can to improve your credit score.
- Pay all your bills on time.
- Keep your credit utilization to less than 30%
- Be careful about how often you apply for credit cards or other financing.
- Keep your old accounts open.
- CHECK YOUR CREDIT REPORT at least once a year. Report all errors right away.
