What is a credit score?
More than just a number, your credit score is ordinarily a three-digit number that rates your credit behavior. For example, how you pay your bills may help, in part, to calculate a score. The lenders see the score as a summary of your credit usage and history. It helps them determine the amount they can justify lending and at what interest rate, known as your creditworthiness.
The three major credit bureaus, Equifax®, Experian™ and TransUnion®, calculate your credit score based on their own, unique formulas. They assign a numerical value to specifics, such as late or on-time payments. These values add up and subtract to match any changes in your credit behavior. That's why lenders perceive your credit score as a snapshot of your credit history.
Why is credit important?
Credit comes into play at many stages of life. For instance, if you want to buy a home or lease a car, the lender will typically perform a credit check. Loan applications often require your social security number and other personal information. This helps the credit bureau open the correct file for you. Your credit score embodies your financial data and, thus, your identity in many ways. So, it's treated much like any form of identification, with strict and secure protections. These safeguards are also for your benefit. After all, they're meant to prevent others from getting a loan in your name.
Security measures like this do more than protect your credit information. They also address the question, Why is credit important? Credit matters because it touches some of the most important parts of life. Even getting a job can depend on your credit. About 16 percent of companies run a credit check on potential employees and nearly a third of employers investigate their credit history for at least some of their new hires.
What does a credit score do?
Though only three digits, this number holds power. It frames your credit history into a concise nugget that makes it easily digestible. It's key to recognize that credit scores are dynamic and ever-changing and capture a snapshot of your creditworthy status for a moment in time. This simplicity helps lender decision-makers assess your credit eligibility, but it's not the only thing lenders look at when determining your creditworthiness. In addition to your credit score, lenders may also look at other factors including your salary, savings, collateral and investments.
How is a credit score determined?
Several factors contribute to your credit score. It starts with your credit history. Whether you’ve made on-time or late payments, the length of your credit history and your credit mix are all pieces of information that help determine your credit score. As your credit behavior shifts, it may impact your score.
Who reports credit scores?
Consumers tend to get their credit scores from the three major credit bureaus: Experian, Equifax and TransUnion. This trio collects and reports your credit history data and your in-depth credit reports. From there, the credit bureaus pass them on to FICO® and VantageScore®. These two agencies then formulate credit scores from your data.
How credit bureaus calculate credit scores
Each credit agency listed above parses the data into five main categories. Then, they calculate each segment into five percentage values. Here’s a breakdown:
- Payment history: This factor represents 35 percent of your credit score. This accounts for the consistency and timeliness of your bill payments over time. The time range the credit agency includes can be anywhere from one to seven years.
- Credit utilization: Also known as amount owed, this segment accounts for 30 percent of a credit score. Credit utilization tallies the amount you owe compared to the credit you have available.
- Length of credit history: This category adds up to 15 percent of value toward your credit score. This segment considers the age of your oldest and youngest accounts. Credit agencies also factor the average age of all your accounts into this segment. They may note your usage rate for these accounts as well.
These last two categories each count for ten percent of your credit score with the credit agency. But they’re quite different:
- Credit mix: Credit mix indicates the types of credit you have. These may include installment loans, credit cards or mortgages. It's not necessary to have all kinds of credit. But it may be beneficial for your score if you have more than one.
- New credit accounts: This includes the total number of new credit accounts and loans you’ve opened or applied for recently.
How often are credit scores updated?
Payment cycle data from creditors funnel into the credit bureau databases. So, reports and scores update in an ongoing cycle. It works like a wheel and turns in a perpetual rhythm as you spend and pay off credit. Creditors pass along a record of these transactions and your credit history builds. This establishes your credit report and provides the data that FICO and VantageScore develop into your score.
What is my credit score?
Checking your score may help you better understand your credit position. It might also give you a window into what potential lenders can see if they look into your credit. Finding out your credit score might also help you identify and remedy incorrect data on your credit report.
One way to do this is with credit monitoring. Credit monitoring services can offer a way to stay aware of your credit situation without disruption. In fact, services like Chase Credit Journey® offer credit scores and monitoring together. So, you can check your credit on a regular basis. They even send you fraud alerts and notify you of changes to your credit history.
In summary – credit matters
Credit matters because it touches your life at many major moments. Now you know what credit can do and how it’s measured — the next step is up to you. Checking your credit score can show you where you stand today to help you plan for a better tomorrow.