You might be surprised to learn your credit score is not the same thing as your credit report. People frequently confuse the two items and falsely believe they are interchangeable when they are not. In our three-part blog series on credit scores vs. credit reports, we’re exploring the differences and how each guides you on your credit journey in different ways. Last week, we dove into more fully understanding your credit report. Now, let’s take an in-depth look at your credit score.
A credit score is a three-digit number ranging from 300 to 900. This score is computed based on your credit history. It is a snapshot in time, helping lenders predict how likely they are to be repaid their loan on time. The score calculation uses many factors, including the length of your credit history, payment history, the total amounts owed, types of credit accounts, and how many times, or how recently, you have applied for new credit or loans. The lower your credit score, the worse your credit report. The higher your credit score, the better your credit report. In short, if your score is lower, you present more risk to lenders. The goal for anyone who wants to raise their score or maintain a high one is to make your payments on time, fully pay off larger loans, and keep available credit limit on open credit card accounts.
FICO and VantageScore
The two most well-known companies that compute your credit score are the Fair Isaac Corporation – better known as FICO – and VantageScore. These two companies are competitors, so each will have a different score using a proprietary methodology to determine them. Even though your score might be higher or lower depending on which company generates your score, your scores will never be so different that they’re not in the same ballpark. VantageScore, a brainchild of the three report reporting agencies, gives an alternative credit scoring method other than the more established FICO score. Why? Until the creation of VantageScore, FICO was the only company available to provide consumers with their credit scores. The competition gave way to competitive prices and perks. FICO is still the more well-known of the two corporations. However, both remain useful in understanding your credit score.
Hard Inquiry vs. Soft Inquiry
When checking your credit score, there are two kinds of inquiry, a hard inquiry, and a soft inquiry. What is the difference?
A hard inquiry, also known as a “hard pull,” is made when you have applied for a new loan or a new line of credit. The lender checks your credit and the record of their review appears on your credit report. These types of inquiries show lenders how often you have applied for credit in the past. As a rule, the fewer inquiries lenders see, the more likely they’re going to open your new credit account. As a result, hard pulls can affect your overall credit report to go down a few points, so be sparing with how frequently you apply for credit.
A soft inquiry, also known as a “soft pull,” is done when a potential employer runs a background check or whenever a current lender checks your credit to offer you new and exciting offers. Checking your own credit is also considered a soft pull. If declined for credit, you can do a soft pull to help investigate the reason behind the denial. These kinds of inquiries do not affect your score, and neither does a denial of credit.
Free Credit Scores
Some banks and credit card companies offer free credit scores as a perk for their customers. Cards such as Capital One, American Express, Discover, and Barclaycard do, to name a few. Some banks that offer score access include USAA Bank, Wells Fargo, and US Bank. These lenders and banks allow you to see your score on your monthly statement and provide tips to improve. They even educate on things that might drag it down. Accept these no-cost benefits so that you can better keep a watchful eye on your credit as it fluctuates.
Free Credit Apps
Some free credit apps on the market, such as Credit Karma, offer your credit score for free. They have become wildly popular, considering you do not have to shell out money from your wallet to see your score. However, they do have drawbacks. For instance, they don’t give you the complete picture of your credit overall. The scoring models do not include your entire credit history. So if your favorite bank or card issuer does not offer a free score, these apps can fill in the gap. If you are actively trying to boost your credit score, you’ll want to use a paid service to do so.
Now that you better understand the difference between a credit report vs. a credit score you can build and maintain stellar credit!
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