In today’s credit-driven society, it may seem like every company or lender is trying to label you with a credit score, which makes it rather confusing. When you understand the different credit score types (and their purpose), things get a lot simpler.
Most people believe they have only one credit score. Some realize they have a score from each of the three Credit Reporting Agencies (CRAs) – TransUnion, Equifax & Experian. However, most people don’t know they have many different credit scores. Scores vary based on the type of credit being applied for. Mortgage scores are different from auto loan scores, and both differ from credit card scores. Each score type (e.g. mortgage, auto, credit cards) uses different scoring formulas. Comparing these scores to one another is like comparing apples to oranges! Confused yet? Hopefully you soon won’t be.
Simply put, your credit score is a measure of how likely you are to pay your debts on time. That said, lenders want borrowers who pay back their debts on time. Some types of debt (credit cards) are more risky to a creditor than other types of debt, such as a mortgage. For this reason, the formulas used are different. Hence, mortgage scores, auto scores, and credit card scores can differ by 100 points or more!
In addition to applying for loans or credit cards, you have credit scores for other purposes. Insurance companies use credit scores to predict the likelihood of you filing future claims – which determines your premium. Employers use your score to get an idea of your level of dependability and financial stability. People with lower scores typically have more financial stress, which often results in missing more days of work and lower work productivity. Even some phone and utility companies use credit scores designed to evaluate your risk level.
Also know that your creditors aren’t required to report to all 3 CRAs. It’s common for a utility company or credit union to report to only one of the CRAs. This is one of the main reasons why credit scores differ between CRAs.
To get your score, you need to have a lender pull your credit in the process of applying for a loan or credit card. Before having a lender pull credit, it’s best to know and follow the fundamentals of good credit score management (i.e. 7 Steps to Better Credit). This way you can take the actions necessary to achieve a higher score prior to having it pulled by a lender. Higher scores mean lower interest rates, or the difference between a loan approval or denial.