Top 5 Times When Your Credit Score Matters The Most
July 7, 2017Hank Coleman
Some people downplay the importance of good credit, but whether you realize it or not, your credit matters. Your credit score and the information on your . It has a tremendous impact on your financial life. You may already know that banks pull your credit report when applying for loans or credit cards, but you may not realize that other institutions pull your credit as well.
As consumers, each of us is entitled to one free credit report from the bureaus each year. You dont have to pay for these reports, nor do these requests affect your credit score. This is one of the best ways to keep an eye on your credit history and catch fraud early. Get Your Credit Scores & Reports From All 3 Credit Bureaus.
On the other hand, when an institution pulls your credit report, it can create a credit inquiry, which can lower your credit score by 2 to 5 points. Your credit report keeps a record of every credit application youve submitted over the past two years.
There are different types of credit report pulls. A soft pull is used by many financial institutions to prescreen applicants, and these dont hurt your credit. A hard pull is an official credit check to determine if youre eligible for financing, and these can hurt your credit. Get your credit and finances on track with Lex OnTrack
The Scoring Model Used In Mortgage Applications
While the FICO® 8 model is the most widely used;scoring model for general lending decisions, banks use the following FICO scores when you apply for a mortgage:
- FICO®;Score 2
- FICO®;Score 5
- FICO®;Score 4
As you can see, each of the three;main credit bureaus; use a slightly different version of the industry-specific FICO Score. That’s because FICO tweaks and tailors its scoring model to best predict the creditworthiness for different industries and bureaus. You’re still evaluated on the same core factors , but the categories are weighed a little bit differently.
It makes sense: Borrowing and paying off a mortgage arguably requires a different mindset than keeping track of and using a credit card responsibly.
The FICO 8 model is known for being more critical of high balances on;revolving credit lines. Since revolving credit is less of a factor when it comes to mortgages, the FICO 2, 4 and 5 models, which put less emphasis on , have proven to be reliable when evaluating good candidates for a mortgage.
How To Monitor Your Credit Reports
Since the mortgage industry looks at all three credit reports and scores, you may want to consider a paid credit monitoring service that pulls more comprehensive data than a free version would.
The best credit monitoring services offer triple-bureau protection, looking at your information across all three .
Experian IdentityWorks Premium monitors all three of your reports to make you aware of activity including score changes,;new inquiries and accounts opened in your name, changes to your personal information and suspicious activity detected. Plus, youll regularly receive updates to your FICO Score.
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$9.99 to $29.99 per month
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Experian for Plus plan or Experian, Equifax and TransUnion for;Premium plan
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Why Are My Transunion And Equifax Credit Scores Different
When you log into your Credit Karma account, you can access your free credit reports and scores from both TransUnion and Equifax. Theyll likely be slightly different, and its possible they could be very different.
Multiple factors could account for why your scores are different.
- Like all credit-reporting agencies, TransUnion and Equifax use proprietary scoring models. And while credit scores are typically based on the same or similar factors including your payment history and number of accounts in good standing each credit-scoring model can weigh those factors differently.
- The credit bureaus may have different information. Not every credit-reporting company will have every bit of information about you. Some lenders may report information to all three big credit bureaus, while others might report to only one or two. And a lender may report updates to different bureaus at different times. So, its possible that Equifax and TransUnion could have different credit information on your reports, which could lead to your TransUnion score differing from your Equifax score.
- You may be seeing scores from different dates. A credit score is a snapshot of your credit profile at a specific point in time. Since credit scores can change over time, its important to compare scores from the same time period when comparing them across credit bureaus.
What factors determine my credit scores?
What Counts Toward Your Score
Your credit score shows whether or not you have a history of financial stability and responsible . The score can range from 300 to 850.;Based on the information in your credit file, major credit agencies compile this score, also known as the FICO score. Here are the elements that make up your score and how much weight each aspect carries.
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What A Fair Good Or Excellent Credit Score Means For You
The better your credit score, the more choices youll have when it comes to applying for a loan or credit card. Thats the bottom line.
If you have a fair credit score and are approved for a credit card, you may be offered a slightly higher interest rate. Your initial credit limit may also be on the lower side. But if you make your payments on time and demonstrate financial stability, you might be able to have your limit increased after 6-12 months.
If you have a good credit score, your chances of being approved for loans and credit cards increases. Youre also more likely to be offered a more competitive interest rate, as well as a more generous credit limit.
Finally, an excellent credit score makes borrowing money and getting credit cards much easier. Its also more likely to get you the best available interest rates and generous credit limits.
Which Credit Score Matters The Most
While there’s no exact answer to which;credit score matters most, lenders have a clear favorite: FICO® Scores are used in over 90% of lending decisions.
While that can help you narrow down which credit score to check, you’ll still have to consider the reason why you’re checking your credit score. If you’re accessing your credit score simply to track your finances, a widely-used base score like FICO® Score 8 works. This version is also helpful for gauging which credit cards you qualify for.;
If you plan to make a specific purchase, you may want to review an industry-specific credit score.FICO lists the specific scores that are used for various financial products. FICO® Auto Scores are ideal if you want to finance a car with an auto loan, while it’s good to check FICO® Scores 2, 5 and 4 if you plan to buy a house.
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How Many Points Off Is Credit Karma
The only possible answer is, a few if any. Your credit score can vary every time it is calculated depending on whether the VantageScore or FICO model is used, or another scoring model, and even on which version of a model is used. The important thing is, the number should be in the same slice of the pie chart that ranks a consumer as “bad,””fair,””good,””very good,” or “exceptional.”
Which Credit Score Is The Most Important One
Again, the answer here can be tricky. Usually, when someone wants to know the answer to this question it is because they are about to apply for credit of some kind and want to be sure that their score is going to stack up. While there are no guarantees preapprovals notwithstanding a few points one way or the other will probably not make much difference. However, if you are on the cusp of one of the credit score tiers it certainly could. For this reason, it makes sense to find out as much as you can.
If you are in this situation the most important credit score for you is the one your lender is going to be using. This is a fair question to ask the lender when you are deciding who you want to use. However, just knowing that they will use FICO and Experian will not assure you that you will get the same score if you order your credit report and score from the same companies.
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Focusing On The Scores That Matter
Given these various brands and scoring formulas, its unlikely that a consumer will ever see the exact same score that the lender is using to make a credit decision.
Even if you both are looking at the same formula and brand, your credit data is likely to vary from day to day, producing a different score, says Rod Griffin, senior director of consumer education and advocacy at Experian.
Some of the biggest differences may crop up when comparing your base FICO 8 score to a FICO mortgage score. Mortgage lenders use older FICO formulas, which are required for mortgages sold to Fannie Mae and Freddie Mac, the government-sponsored entities that purchase most residential home mortgage loans.
These older FICO scores used in mortgage lending will weigh some factors more heavily or lightly than the newer scores. For example, if you have debt collection accounts with zero balances, they wont be counted by more recent scoring formulas. But under the mortgage score formulas, they will be considered, says Ulzheimer.
When it comes to credit card or auto loan scores, the FICO formulas are adjusted for factors designed to be more predictive for risk in those transactions. Your history of repaying previous auto loans counts in your auto score, while bankcard scores focus on credit card accounts.;
Consumers can get access to 28 FICO credit scores, including those from the major credit bureaus and auto and bankcard industry specific scores, at myFICO.com, FICOs consumer website. ;
Did You Know You Have More Than One Fico Score
Since FICO Scores were introduced to lenders over 25 years ago, they have become the best-known and most widely used credit score. But quite a bit has changed since lenders first started using FICO Scores in 1989. Lender credit-granting requirements, data reporting practices, consumer demand for credit and consumer use of credit have all evolved.
To help lenders make more informed credit-granting decisions, and to help ensure you get access to the credit you need, the FICO Score model has been updated periodically over the years. As an example, we use credit much more frequently than we used to. FICO Scores have been updated to reflect this change in behavior. If we didn’t, seemingly normal credit usage today would be considered a higher risk than in years past.The result is that there are multiple FICO Score versions available, in addition to the most widely used version, FICO Score 8.
| Experian |
| FICO Score 10T |
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Types Of Credit Scores
Different types of scores can exist for various lending purposes. For example, FICO offers specialized scores for financing a vehicle, obtaining a mortgage, and qualifying for a credit card.
Both FICO and VantageScore are constantly refining their models, and the exact model used can have an effect on your score. FICO Score 9 is the latest version of the FICO model, although FICO Score 8 is still used more frequently. The latest version of VantageScore is VantageScore 4.0.
FICO 9 makes a distinction between unpaid medical bills and other types of debts.
How Is A Credit Score Calculated On A Joint Mortgage
When two people decide to buy a house together, they have a lot to consider. You and your partner have likely talked about how you’ll combine your finances, share expenses and save for major purchases.
Buying a home is one of the biggest decisions people will make. You’ve probably kept careful track of your credit score and made sure not to do anything that could lower it.
But what about your partner’s credit score? If you and your partner decide on a joint mortgage, both of your credit scores will come into play. This guide will review how credit scores work, how they affect mortgage applications, how to calculate credit score on a joint mortgage and what to do if your partner has bad credit.
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How Your Credit Score Affects Your Mortgage Eligibility
When it comes to getting a mortgage, your credit score is incredibly important. It determines:
- What loan options you qualify for
- Your interest rate
- Your loan amount and home price range
- Your monthly payment throughout the life of the loan
For example, having a credit score of excellent versus poor could save you over;$200 per month;on a $200,000 mortgage.;
And if your credit score is on the lower end, a few points could make the difference in your ability to buy a house at all.
So, it makes sense to check and monitor your credit scores regularly especially before getting a mortgage or other big loan.;
The challenge, however, is that theres conflicting information when it comes to credit scores.
There are three different credit agencies and two credit scoring models.;As a result, your credit score can vary a lot depending on whos looking and where they find it.;
How Credit Scores Are Calculated
The most common score producer is FICO. According to FICO, its scores are used in over 90% of lending decisions. You actually have more than one FICO score because FICO has many different scoring models. So, your score will likely vary depending on the modellike FICO, FICO 8, FICO 9, or FICO 10Tused to produce it and which credit reporting agency provided the underlying credit report. FICO also offers industry-specific variations of its scoring models, like for the auto, credit card, and mortgage industries.
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More Credit Karma Services
But, besides this free service, Credit Karma has other related services, including a security monitoring service and alerts for new credit checks on you. Outside of Credit Karma, many of the best credit monitoring services provide similar alerts and services.
And, once it has your personal information, you can search for personalized offers for a credit card, a car loan, or a home loan, and your search won’t pop up in your credit report on Credit Karma or anywhere else. A standard section of credit reports is “inquiries,” which lists requests for your report from lenders you’ve applied to for a loan.
Reasons Why Your Credit Score Differs
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Payment History: 35 Percent
The largest chunk of your FICO® Score is based on payment history, and a solid reputation for making your payments on time each monthsuch as credit card bills and mortgage loan paymentsis ideal. Any instances of bankruptcies, liens, repossessions, foreclosures or late payments may adversely affect your score.
What Is A Good Vantagescore
FICO’s competitor, VantageScore;produces a similar score using the same credit report data;from the three bureaus.
A good VantageScore lies between 661 and 780, which the company calls a “prime” credit tier. VantageScores above 780 are considered “superprime” while those between 601 and 660 are “near prime.” VantageScores below 600 are considered “subprime.”
The average VantageScore 3.0 in July 2021 was 693.
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How Your Credit Scores Are Made And Why They Matter
Since there are few numbers that matter as much to your financial well-being as your credit score, it helps to know what your scores mean and how they work.
First, know that theres a big difference between a credit report and a credit score.
- Your credit report is a record of your borrowing history Each loan or line of credit youve opened, dates on those accounts, payment history , and so on. Overall, it shows how reliably you manage and pay back your debts
- Your credit score sums up your credit report in a single number It weighs every item on your credit report to come up with an overall score that sums up how responsible of a borrower you are
The big three credit bureaus Equifax, Transunion, and Experian operate in the realm of credit;reporting.;
Each one keeps a separate record of your borrowing history, based on the information your creditors send them.;
The other players in the game FICO and VantageScore are responsible for credit;scoring. They determine your score based on whats included in those credit reports.;
For example, keeping your credit utilization ratio low can help your credit scores, while repeatedly neglecting to pay your credit card bills on time can hurt them.