Your credit score is one of the most vital components of your financial life. It holds the key to obtaining a mortgage, auto loan, or credit card. Even the amount you pay for insurance or your ability to get a job can be affected by this little three digit number.
Yet, according to a survey by the American Bankers Association, nearly 60% of Americans don’t even know their own credit score.
“People might have a scare when they apply for a loan and discover that a low credit score could mean a higher interest rate or no loan at all,” explains American Bankers Association senior vice president Nessa Feddis.
So what exactly is a FICO credit score?
Your payment history to your various creditors is compiled into a credit report by each of the three major credit reporting agencies, – Equifax, Experian, and TransUnion.
This credit report tells if you have ever been late with payments or defaulted on your commitments to various lenders including store credit card merchants, major credit card companies, utility companies, and landlords.
In addition, the credit report lists public record information like bankruptcies, foreclosures, and tax liens. If you’ve ever been late on a cellphone bill or student loan payment the information is likely in your credit report.
In 1989 the Fair Isaac Co. developed an algorithm that distilled the information in your credit report into a three digit number which became known as a FICO credit score or FICO score.
The FICO score is used by banks and lenders to determine if you qualify for a loan and what interest rate you’ll be charged. Other businesses use your FICO score as well to determine if you can rent an apartment or to determine how much you’ll pay for homeowners or auto insurance.
Scores typically range from 300 to 850. The higher your score, the better your creditworthiness.
Why do I have more than one FICO credit score?
Most Americans fail to understand that they don’t have a single credit score but multiple credit scores.
Here’s why.
Since the information in your credit report from each of the three major credit reporting agencies is slightly different, each credit report will yield a slightly different FICO score. Therefore you’ll have an Equifax FICO credit score, an Experian FICO credit score, and a TransUnion FICO score.
Why should I get a free copy of my credit report?
With the financial stakes so high, it’s amazing that nearly 80% of all credit reports contain errors, with 25% containing errors serious enough to significantly affect your credit score. That’s why it’s important to obtain a copy of your credit report and identify any errors that might be contained in it.
Remember, you can get free, no strings attached, credit reports by visiting annualcreditreport.com. This is the only federally approved location for obtaining free credit report information from the big three credit reporting agencies.
How do I get a copy of my FICO score?
While it’s easy to get a free copy of your credit report, it’s not as easy to get a free copy of your FICO credit scores.
myFICO.com allows you to obtain your FICO scores based on the credit reports from the major credit reporting agencies – Experian, TransUnion, and Equifax, for a fee of course.
Typically it will cost you between $29.95 to $59.85 to obtain your FICO credit scores from all three agencies.
However recently, a few credit card companies have started providing free FICO scores to their customers. Discover Card, for instance, now provides its customer with a free TransUnion FICO score every month.
What about those free credit scores that are advertised all over the place?
Now here is where it gets interesting.
Due to the success of the FICO credit score model, many other companies wanted to get in on the lucrative credit scoring market. In 2006 the VantageScore credit score was created.
Like the FICO score, the VantageScore is a credit score that is calculated from the information in your Experian, Equifax, or TransUnion credit report.
The VantageScore was created specifically to go head to head with the FICO score but has failed to gain traction. Today 90% of lenders still use the FICO score to make their lending decisions.
Just like the FICO score, you’ll have a VantageScore for each one of the major credit reporting agencies (you’ll have an Experian VantageScore, Equifax Vantage Score, and TransUnion VantageScore).
Because the VantageScore is much cheaper to purchase than the FICO score, many enterprising websites now allow you to obtain your VantageScore for free. They make their money by advertising services, loans, and credit cards for which you might qualify based on your credit.
Among the most popular such websites are CreditKarma.com, Quizzle.com, and LendingTree.com.
Unfortunately, your VantageScores can vary considerably from your FICO scores. Often the difference can be as much as 50-100 points. And remember that it is the FICO credit scores that most businesses use to make their lending decisions.
So if the free credit scores provided by the likes of Credit Karma, Quizzle, and Lending Tree are not the scores used by most lenders what use are they?
While the FICO score is used by 90% of lenders, sites like CreditKarma and Quizzle, which offer free VantageScores, can be still be extremely useful. They provide in depth details on how you can improve your VantageScores.
Additionally, you can often track your VantageScore from month to month or quarter to quarter to help determine if you’re making strides in improving your credit score.
Here’s the key point. The actions you take to improve your VantageScores will also tend to cause your FICO scores to rise as well. By using these websites to help improve your VantageScores you will also be working to improve your FICO scores.
My suggestion is to use the free services like Credit Karma, Quizzle, and Lending Tree to improve your credit and then go to myFICO.com to purchase your FICO scores when you are about to consider obtaining a loan.
BMWK, do you know your credit scores?