Which of the following is NOT a type of credit score?
If you said “C) TransUnion”, you’re right! TransUnion is one of the three major credit bureaus, NOT a type of credit score.
Understanding your credit score can help you manage debt, secure loans, and achieve financial goals. Let’s talk about how credit scores work, why they matter, and how you can improve yours.
Understanding Credit Scores
A credit score is a three-digit number that represents your creditworthiness. Lenders, landlords, and even some employers use it to determine how responsible you are with credit. The most common types of credit scores include:
FICO Score – Created by the Fair Isaac Corporation, this is the most widely used credit scoring model by lenders. FICO scores range from 300 to 850, with higher scores indicating better creditworthiness. Different versions of FICO scores exist, including industry-specific scores for auto loans and credit cards.
VantageScore – Developed by the three major credit bureaus (Experian, Equifax, and TransUnion), this score provides an alternative to FICO. It also ranges from 300 to 850 but weighs factors slightly differently. Some lenders prefer VantageScore, especially for consumer credit monitoring.
Equifax Score – This is a proprietary scoring model used by Equifax to assess credit risk. Since proprietary scoring models aren’t standardized across the industry, their criteria and score ranges may differ from traditional scores. However, they still generally consider key credit factors like payment history, credit utilization, and length of credit history (more on that below). While not as commonly used as FICO or VantageScore, Equifax scores can still impact lending decisions when a lender pulls an Equifax credit report.
How Are Credit Scores Calculated?
Your credit score is determined by several key factors. Understanding these elements can help you make better financial decisions and improve your score over time.
Payment History: This is a key factor in your credit score. It reflects whether you pay your bills on time, including credit cards, loans, and even some utilities. A single late or missed payment can impact your score, so setting up automatic payments or reminders is encouraged to help ensure consistency.
Amounts Owed: Also known as credit utilization, this factor considers how much of your available credit you are using. Keeping your credit card balances low in relation to your credit limits, ideally below 30%, can help maintain a healthy score. High utilization suggests financial strain and may lower your score.
Length of Credit History: The longer you’ve had credit accounts open, the better it is for your score. This factor looks at the age of your oldest account, the average age of all your accounts, and how recently you’ve used credit. Keeping older accounts open, even if you don’t use them often, can positively affect this aspect of your score.
New Credit: Opening multiple new credit accounts in a short period can lower your score temporarily, as it suggests potential financial instability. Each time you apply for a new credit card or loan, a hard inquiry is recorded on your report. While one or two inquiries won’t cause much harm, too many can be a red flag to lenders.
Credit Mix: Having a diverse mix of credit accounts—such as credit cards, mortgages, auto loans, and student loans—shows that you can manage different types of credit responsibly. While you don’t need to take on unnecessary debt, responsibly managing a variety of credit accounts will improve your score over time.
Why Is Your Credit Score Important?
A strong credit score offers many financial benefits and opportunities, including:
Loan Approval & Interest Rates: A higher credit score increases your chances of being approved for loans, such as mortgages, auto loans, and personal loans. It also helps you secure lower interest rates, saving you money over time.
Credit Card Offers: Many premium credit cards with rewards, cashback, and travel perks require a good to excellent credit score. The better your score, the better the card options available to you.
Rental Applications: Landlords often check credit scores to determine if a potential tenant is financially responsible. A strong score can make renting an apartment or house easier and may even help you avoid paying higher security deposits.
Employment Opportunities: Some employers check credit reports for certain job positions, particularly in finance or security-related fields. A good credit score can demonstrate financial responsibility and reliability.
How to Improve Your Credit Score
If your credit score isn’t where you want it to be, don’t worry. There are actionable steps you can take to improve it:
Pay Bills on Time: Since payment history is the most significant factor in your score, make it a priority to pay all bills on time. Even one missed payment can have a lasting impact.
Keep Credit Utilization Low: Try to use less than 30% of your total available credit, and if possible, keep it even lower. Paying off credit card balances in full each month is the best way to maintain a low utilization ratio.
Avoid Opening Too Many Accounts at Once: Each time you apply for credit, a hard inquiry is recorded on your report. Limit the number of new accounts you open to prevent your score from dropping due to multiple inquiries.
Check Your Credit Reports Regularly: Errors on your credit report can negatively impact your score. You’re entitled to one free credit report per year from each major bureau (Experian, Equifax, and TransUnion) at AnnualCreditReport.com. We encourage you to set an annual reminder to review your reports and dispute any inaccuracies.
Keep Old Accounts Open: Even if you no longer use an old credit card, keeping it open helps maintain a longer credit history, which benefits your score. Of course, you may choose to close accounts that come with high fees or other negative terms.
Diversify Your Credit Mix: While you shouldn’t take on debt unnecessarily, having a mix of revolving credit (credit cards) and installment loans (mortgages, car loans) can demonstrate responsible credit management.
The Bottom Line
Your credit score is a key component of your financial health. By understanding how it works and making informed financial decisions, you can improve your score and unlock better opportunities. Whether you’re looking to buy a home, finance a car, or simply build strong financial habits, a good credit score can help you achieve your goals. If you are looking for more individual help and want to take control of your credit, don’t hesitate to reach out to Coloramo FCU today. Let’s work together to find the best path forward, to help you reach your financial goals!