A credit score tells lenders if you will be able to repay a loan, like a credit card or a mortgage. It is calculated from information in your credit report.
Your credit report will include all of the details regarding your debts and payments, including any late payment. Your credit report provides information to creditors that will allow them to assess whether or not they can trust you enough for them. If so, the information can be used to calculate how much interest you should pay.
Typically, a credit report includes up to five-years of credit and loan history. This includes the amount of money you owe on your loans, such as your credit card balances and your mortgage loan, as well as how much you've borrowed. It also includes how often you've been late with your loans and credit cards and whether you've had any derogatory items such as collections, bankruptcies or foreclosures.
You can find your credit reports at all three of the major credit bureaus, Equifax, Experian and TransUnion. Each of these bureaus has its own credit scoring model and uses its own calculations to determine your score.
The majority of credit scores use the same factors to calculate your score, including payment history and credit types. The main difference is how much weight the different factors carry in the score calculation.
Payment history accounts for about 35% in your credit score. It is especially important to make on-time payments, as any late payments will lower your score.
Another factor that affects your score is your utilization rate, which refers to the amount of credit you owe compared to your total available credit limits. Your utilization rate can be reduced by paying off old bills or by increasing your credit limit.
Your credit utilization may increase your chances of getting credit. If you have low credit utilization, lenders will likely be more inclined to lend you money, as they see you as a responsible and reliable borrower. You should also consider the length of time you've had credit, how much credit you've used and whether or not your inquiries for new credit have increased.
There is a small difference in the credit scoring methods used by the major credit agencies. FICO, a newer, less sensitive model, gives more weight to VantageScore.
People with good or excellent credit should know that there may be a big difference between the score given by one source and that of a lender. The discrepancy can be as small at 20 points or even as large as an entire score. The difference is usually a result of errors in your credit report that appear only on one bureau's reports. It is best to check your credit reports for errors regularly.