Eight Things You Need To Know About Your Credit Score (Part 1)

Maybe it’s time to purchase that home. Maybe you want to buy a new car. Maybe you just want to live debt free. Whatever the reason, understanding the impact these activities will have on your credit score is important.

It is important to know how paying off debt or increasing your debt will imapct your credit score. Most people think that paying off debt will automatically increase their credit score, but the truth is, it may actually lower it.

Here are eight things to consider about your credit score that you may not know:

(1) There are many different types of credit scores: There are numerous credit scoring models that lenders use to establish your credit risk or worthiness. Each lender can pick which best fits their wants and needs. Some use blended scoring models such as a combined average from Trans Union, Experian, and Equifax, while others use weighted averages according to their industry.

For example, an auto lender may calculate a credit score differently than a mortgage lender. However, generally speaking, if you have a good credit score it will be reflected as such regardless of the model used.

(2) Understand the credit reporting agency doesn’t determine risk, they simply report your credit activities that results in a credit score: Remember, the credit reporting agencies DON’t determine whether you qualify for an auto loan, or what interest rate you get, the lender does.

The credit reporting agencies collect your credit ativity, good, bad, or none, to those that request it. Based upon that data, the lender determines whether they borrower you money and at what interest rates.

Your “credit activities” are reported to credit reporting agencies by other lenders you have done business with. For example, each of your creditors will report to Experian, Trans Union, and Equifax your borrowing activites and payment history from credit cards, mortgage companies, utilities, prior landlords, auto loans, student loans, etc. Your report will also indicate any accounts that have gone to collections and which accounts have been paid in full, or open accounts. Information from public records may also be included.

Payment history is also essential to a good credit score. Credit reports will show your history of on-time payments, late payments, and defaults. All are negative towards your credit score.

(3) Its common for credit scores to vary between the three national reporting agencies: There are typically differences in your credit score depending on which credit reporting agency is used.

The reason? Not all creditors report their data to all three agencies. Some only report to one agency, while others may report to all three. For example, an auto lender may only report your payment history to Experian, while your mortgage lender may report to all three agencies. Therefore, your credit report/score may be slightly different.

Don’t forget, each credit reporting agency may use different scoring models even if each agency has the same information. The model used can change your score.

Make sure there is no incorrect data. If there is an error on your report, it will adversely impact your credit score. It is important that you file a Uniform Dispute Resolution with the credit reporting agency to correct the discrepancy. In correct information may also indicate potential identity theft.

(4) Certain information may NOT be used in calculating your score: Your age, marital status, race, gender and religion may not be used in calculating your credit score or credit risk.

Disclaimer: The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions.