To begin to understand your credit report and the number assigned to it, you need to know a bit about what that number represents and how it is used by lenders. Your credit score is a number used to predict how likely you are to pay back a loan on time. Lenders use this number to help them make credit decisions that affect your ability to get credit and to determine the conditions of your loan.
Many consumers think that there is a single number that represents their personal credit and that everybody uses the same number, in reality it’s just not that simple. There are three large Credit Reporting Agencies (CRAs) used in this country and they all have their own methods for gathering information used to understand your credit history. The CRAs are companies that gather, organize, standardize, and then distribute consumer credit information to industry providers and lenders. While there are many similarities between the three big CRAs, each have their own proprietary scoring models (formulas) and each may have slightly different credit information to look at when they calculate your score. Even their models produce three slightly different score ranges:
Equifax produces a score range of 280 – 850
Experian produces a score range of 330 – 830
TransUnion produces a score range of 300 – 850
To complicate things even more, there are other third-party scoring companies that use the credit information gathered by the CRAs and produce their own credit scores. The biggest and most widely used of these third-party scoring companies is FICO, or Fair Isaac Corporation. FICO offers several different models, built for specific industries and credit uses, but they are all designed to produce scores that fall in the range of 300 to 850. The FICO score range is the one most commonly referred to when describing your credit score.
Where you fall in this range from 300 to 850 reflects the ‘quality’ of your credit history and a measure of the risk a lender will take to lend you money; the higher the FICO score the better. For example, you are much more likely to receive favorable credit terms if your FICO score is 680 or above, as most lenders consider this score an indication of good credit. On the other hand, if your FICO score is 500 or below you will find it very difficult to receive offers of credit. It’s important to remember that your current score is a snapshot in time and will change, for better or worse, based on how you manage your credit. Ultimately, you have the power to improve your score and reap the benefits of being a good steward of your financial resources.