Most People Don't Know Enough About Credit Scoring, So Here Are the Things You Need to Know

Your credit score is one of the most important numbers when it comes to how much you pay to borrow money, so you should understand how that number is made and changes

Most people are able to answer basic questions about credit scoring, but don't really know as much as they should. Most people don't know details or get things wrong. Because credit scores play such a vital role in how much you pay when borrowing money, it is important that you understand some key things about credit scoring. Knowing these things can save you a lot of money in the long run.

Credit reports are not the same as credit scores

Your credit score, which is a number, is an indication of your creditworthiness. It gives potential lenders an idea of how likely you are to repay your debts. The credit score, which varies from one credit reporting agency to another, is built from the information on your credit report. A credit report is a detailed record of your credit history, but it is not the score itself.

Each credit reporting agency calculates things a little differently

There are three major credit reporting agencies or credit bureaus, as well as the newer VantageScore. They all calculate credit scores a little differently and each has different high and low ranges. Because each credit score comes from the information on that bureau's report, your score can vary greatly from one to the next if the information is different. That is why it is important to check your report at each of the credit bureaus.

Credit scores are determined by different factors

Your credit score is built from a detailed record of your credit history, including types of accounts, how often you apply for credit, public records, and more. While there are many contributing factors, some weigh more heavily than others.

• Payment History: Late payments can lower your score. How often you make late payments factors into your overall credit score. Payment history is the largest part of the credit score.
• Credit Utilization: This is how much of your available credit you are using. Aim to use less than 30 percent of your total available credit.
• Age of Accounts: Older accounts, especially those paid on time, are better for your score than newer accounts.
• Types of Accounts: A mix of credit types shows you can manage different forms of debt responsibly.
• Credit Inquiries: Applying for credit places an inquiry on your credit report. Too many inquiries in a short time can lower your score, except when rate-shopping for the same type of loan within a short window.

Checking your credit does not hurt you

When you apply for credit, your score can drop slightly for a short time. But checking your own credit report or score does not affect your score. You are not penalized for reviewing your credit to ensure accuracy.

You do not have to pay for credit reports

You are legally entitled to one free credit report each year from each of the three major credit bureaus (Equifax, Experian, and TransUnion), available only from this website. NCCC helped pass the federal law that created this benefit. Be cautious of other sources that try to sell you credit reports or enroll you in monitoring services you may not need.

Credit errors and low scores can cost you thousands

Errors that result in negative items on your credit report can lower your score and cost you more in interest when you borrow money. Even a few points can push you into a lower credit tier. Check your reports regularly and dispute errors promptly. To rebuild credit, use credit sparingly, make on-time payments, and apply for new credit only when necessary.

Joint credit scores do not exist

Your credit score is individual. A spouse’s score does not directly affect yours unless you share accounts. If a joint account is mismanaged, it will negatively affect both credit reports.

Negative items eventually disappear

Even severe negative items will drop off your report over time if you bring accounts into good standing and maintain them. The time frame varies, but even bankruptcies eventually expire from your report.

Not all lenders use the same score

Many lenders use FICO scores, but some use VantageScore. Even within FICO, different versions such as FICO 8 or FICO 9 can give different results. A score you see online may not match what your lender sees.

One credit report may be different than another

Each bureau collects data from different sources. An account may appear on one report but not another, which is why checking all three is essential before applying for credit.

Credit repair companies

Legitimate credit repair companies exist, but the industry attracts scams. Avoid any that demand payment upfront or advise you to misrepresent information. You can dispute errors on your own at no cost.

Late payments are not reported immediately

Creditors must wait until you are at least 30 days past due before reporting a late payment. While this grace period may prevent it from hitting your credit report, you can still face late fees or interest rate increases.

Credit scores are only part of the decision

Lenders also consider your income, employment history, and overall ability to repay. A strong score is valuable, but financial stability matters just as much.

What is a good credit score?

Credit score ranges vary by bureau, but generally, 800 or higher is excellent. Lenders may be cautious with scores under 700 and often reject applicants below 600.

What to Remember

• Credit reports and credit scores are not the same thing.
• Check all three major credit bureau reports each year.
• Pay on time because payment history matters most.
• Keep credit utilization under 30 percent.
• Review reports for errors and dispute them quickly.
• Score ranges differ by model and lender.
• A strong score helps, but lenders also consider income and stability.