Everything You Need to Know About Credit Scores

Mortgage 101
Credit scores can be a mystery, but it doesn't have to be. We're here to answer all your questions about credit scores and how to use them for your financial well-being.
Published on
July 27, 2023
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Introduction

A credit score is a number that indicates the likelihood that you'll pay back your debts. It's based on the information in your credit report, which includes everything from past loans and current balances to late payments and bankruptcy records. Your score helps creditors decide whether to lend money or extend credit to you. The higher your score, the less risk they perceive when extending credit.

What is a credit score?

A credit score is a number that represents your creditworthiness. It's used by lenders to evaluate whether you're likely to repay your debts, and it's based on the information in your credit report. Your three-digit credit score will be calculated using information from all three major credit bureaus: Equifax, Experian, and TransUnion.

Your current or past financial behavior (how often you pay bills on time) will have the largest effect on determining whether you get approved for loans, mortgages and other types of financing such as leases or car loans.

What should I know about my credit score?

There are a few things you should know about your credit score. First, it's just a number between 300 and 850. What that means is that there's no such thing as a perfect score—everyone has some number of points that makes up their overall credit score, including people who have paid off every single debt they've ever accrued (and yes, those people exist).

The second thing to know about your credit score is that it's based on both your payment history and the amount of debt you have. Your payment history accounts for 35% of your final number, while the amount of total debt you have accounts for 30%. The remaining 35% is made up by other factors like length of time with open accounts or whether or not you've been denied access to new lines of credit recently.

The last thing that’s particularly helpful to know about your personal credit report is how much each category contributes to its overall percentage rating: The FICO 8 formula gives us an idea on how information like open lines of credit, installment loans (like car loans), revolving balances (credit cards) and collection items affects our scores most significantly.

Why do people have different credit scores?

Credit scores are based on statistical models. These models take into account how you’ve used credit in the past, including how much debt you have, how long it has been since you last applied for credit and other factors. The data that goes into these models is gathered by the three major credit bureaus (Equifax, Experian and TransUnion) who collect information from lenders such as banks or credit card companies.

Credit scoring models are updated periodically so they don’t become outdated or obsolete over time. Because of this constant updating process, there can be some fluctuation in your score depending on what information is collected during a particular update cycle.

How do I get my credit score?

You can get your credit score from a credit bureau, a credit monitoring service, or directly from one of the three major credit bureaus in the United States: Experian, TransUnion and Equifax.

You can also pay to receive your credit score directly from any of these companies. However, there are some caveats that come with getting it this way: Your score won't be free; there's no standard format for how each one reports its scores; and they aren't required by law to give you the same information they'd send someone else (in other words—you could get different results than someone who looks at their score).

How to check your credit score.

You can check your credit score by getting a free copy at one of these places:

  • Credit card companies. Some card companies offer you a free credit report and score from Experian, TransUnion, or Equifax when you apply for their cards. (These are the three major companies that most lenders use.)
  • Credit unions. Many credit unions give members access to their FICO scores for free—and some even let them see how they measure up against other members' scores.
  • Banks. Your bank may provide this service if it offers other financial services in addition to banking products; these are often called "full-service" banks.
  • Online services like Credit Karma and Credit Sesame offer free access to your TransUnion Score along with explanations of what each component means
What's the most common misconception about credit scores?
  • Credit scores are not the same as credit reports: A credit report is a collection of information about your debt history, and it's shared with lenders. Your score is an estimate of how likely you are to repay debts on time based on the information in your credit report.
  • Credit scores are not the same as credit limits: The amount of money you can borrow from a lender is determined by many factors besides just your score, such as income, assets and other financial responsibilities like car payments or student loans (or lack thereof).
How does your credit score affect your home loan

Your credit score is a number that creditors use to predict the risk of lending to you. The higher your score, the lower the risk; therefore, having a high credit score can make it easier for you to get approved for a loan and receive better terms on your loan (such as lower interest rates).

In general, there are three factors that contribute to your credit score: payment history, amount owed/credit utilization and length of accounts. For example, if you make payments on time every month and have few open lines of credit (lines of credit with balances), then these factors will positively impact your score. Conversely, if you have late payments or carry large amounts on multiple lines of credit in relation to their limits this could negatively affect your overall rating.

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