Have you recently experienced a bankruptcy? Do you have some late payments or collection accounts showing up on your credit history? If you answered yes to either of these questions, you are probably trying to figure out how to rebuild your credit. In order to do this, you will have to work towards increasing your credit score. And to achieve a higher credit score, you must not be fooled into believing the credit myth that there is only one FICO score.
This post has been sponsored by Lexington Law. All opinions are mine alone and are honestly conveyed.
You have more than one FICO score
Creditors use your FICO score to evaluate the risk of extending credit to you. But your credit score isn’t just one number—you actually have three credit scores. There are three different credit bureaus: Transunion, Experian, and Equifax. These agencies receive information about you from your current creditors and assemble that information into a credit risk score. Some creditors send and receive information from only one credit bureau, some use all three. Each credit bureau only uses the information—both positive and negative—that is supplied to it by the creditors that utilize that particular bureau. So it is quite important to know what is reporting to each bureau and work to make sure that all information that is reporting is accurate and updated—to not just one bureau, but all three.
FICO score vs. credit score
FICO is an acronym used to represent the Fair Isaac Corporation—the company that creates the credit scores that the vast majority of creditors use to evaluate creditworthiness. So, a FICO score is basically a synonymous term, interchangeably used with the term credit score. A credit score is a number ranging from 300-850, which indicates your future credit risk. FICO calculates the credit risk based on historical patterns of creditworthiness. Creditors will use this number to determine if they will to lend to you, the maximum amount that they will lend to you, and at what rate they will lend to you.
How is a credit score calculated?
Each bureau has slightly different information that they use in order to calculate your credit score. While each bureau may be utilizing the same formula created by Fair Isaac Corporation to produce a score, keep in mind that not all creditors report to every bureau, so the information that each bureau is using will likely generate a small range of scores. However, they all use the same basic credit components to calculate your score:
- Payment history
- Level of debt, as compared to available credit
- Number of open accounts
- Type of accounts
- Length of credit history
- Number of recent credit inquiries
Why do I need to worry about all 3 credit scores?
Not all creditors report to all three of the credit bureaus, likewise, not all creditors check all three bureaus when they are evaluating your creditworthiness. While a mortgage lender may use a tri-merge credit report and obtain information from all three credit bureaus during their approval process, a creditor for a smaller amount, such as a credit card company, may only look at a single credit bureau when determining your risk level. Because you likely won’t know ahead of time which bureau the credit will be using to obtain your score, nor will you have a choice in which one they will use, it is important to know what each of your scores are and make sure that each bureau has updated and accurate information to reflect the highest score possible.
Because some lenders only look at one bureau, they may not be seeing the entire picture of your credit history. For instance, if you have one credit card that has a late payment history or collection accounts that are only reporting to one of the bureaus, your FICO score generated by that credit agency may be quite a bit lower than your other two credit scores. So if that happens to be the bureau that your new creditor is using to review your creditworthiness, you may end up with a lower credit line and a higher rate than you’d like—or even deserve.
Understand how your credit score impacts your monthly bills
Your credit score will have an influence on the rates that you qualify for when obtaining financing. So when you apply for a new credit card, auto loan, or a mortgage, creditors base the programs and rates that they offer to you on your credit score. If you have a high credit score, you are going to qualify for a lower rate, which will give you lower monthly payments. If your credit score is low, creditors will lend to you at a higher rate because they look at you as more of a risk, thus causing you to have higher monthly payments.
While your credit score can fluctuate and change, relatively based on the information that is reported each month, once a creditor has extended credit to you, the rate and terms will not likely change. So how does this affect your monthly bills? It means that if, for example, you are approved for a car loan based on a lower score, and you may be locked into a higher interest rate, which in turn, causes your monthly car payment to be higher than if you would have been approved with a higher credit score.
Check your credit report
It is important to regularly review your credit report to make sure that the information reporting on you is accurate and up-to-date. It will not do you very much good to work hard to pay your bills on time and get everything up-to-date, just to have old accounts showing up, or negative items that have not been cleared off your report to continue to drag down your score. Monitoring your credit to make sure it is accurate is crucial to the credit rebuilding process. It is also critical to review your credit to make sure that no fraudulent activity is taking place.