Understanding Credit Scores and Credit Reports
When a person is interested in learning what their credit rating is, there are several important terms to understand. The terms "credit score" and "credit report" are often used interchangeably, however they are very different things. A credit score is an actual numerical rating given to express a person's creditworthiness. Put simply, it allows potential lenders to know how likely the person in question is to pay back the money they use on credit. A credit report is a document provided by three credit bureaus, which outline why a person has a certain credit score. It contains past credit information, background information and how often the person has applied for credit. The credit report is just that, a report detailing the specifics of a person's credit score.
FICO Credit Rating
The FICO credit scores are the numbers that most lenders use to determine a person's credit risk. The FICO score is reported from three different credit bureaus, TransUnion, Equifax and Experian. The range for these scores is from 300 up to 850. Simply put, the higher the score, the lower the credit risk. The FICO score is determined by a combination of certain aspects of a credit report. This includes:
- A person's payment history. This constitutes 35% of their FICO score, and is the most important factor to consider.
- The amount a person owes on their current debt. This constitutes 30% of the FICO score.
- The amount of time a person has had established credit constitutes 15% of their score.
- The type of credit accounts they have constitutes 10% of the score. The more variety (credit cards, auto loans and mortgages), the higher the score.
- The last factor is how many times a person has approved a credit inquiry, which constitutes 10%.
- In order to aid those individuals who have been repeatedly denied for home loans, FICO embarked on a joint venture with CoreLogic. This is intended to help those consumers in this position.
The Benefits of Vantage Score
The Vantage Score system was introduced to compete with FICO as the leading provider of credit ratings in the U.S. Its main goal was to improve the way that credit scores were determined. By providing a more accurate and understandable system, consumers are able to have a clearer understanding of their credit score.
VantageScore determines their scores by six contributing factors:
- A person's current credit accounts for 30%.
- A person's payment history constitutes 28% of the score.
- The amount of credit being used accounts for 23%.
- A person's current and past credit balances constitute 9% of the score.
- The mixture of different types of credit accounts for 9%.
- The person's ability to receive credit accounts for 1%.
The numerical value of VantageScore ranges from 501 to 990. Each numerical score is then paired with a corresponding letter grade:
- 900-990 is equivalent to an A
- 800-899 equals a B
- 700-799 equals a C
- 600-699 equals a D
- 599 and below constitutes an F
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