A credit score is a critical component of your financial health and can potentially cost you or help you save money. Statistically, it represents your reliability as a borrower, which affects not only the interest rates you get but also the chance you're approved for lending and how much money you can borrow from an institution. For better or worse, this three-digit figure is more than just a number.
How do credit scores work?What is a credit score exactly and how does it work? The number is based on various factors from your financial history. This includes your payment history, your credit utilization ratio, how long your accounts have been open, how many new accounts you have, and the variety of accounts you carry.
The higher your score, the better. People with high credit scores can generally expect to be approved for various types of lending and qualify for good (low) interest rates.
FICO Score vs. VantageScoreYou've probably heard of FICO and VantageScore. Though these aren't the only scoring systems, they're the most commonly used by lenders to evaluate a borrower's risk.
So, what's the difference between a FICO Score and a VantageScore? FICO Scores have always ranged from 300 to 850. Previously, VantageScores ranged from 501 to 990, but the analytics firm has now adopted the same scale.
Both are used by banks, credit unions, credit card companies, and mortgage brokers to determine loan approval and interest rate for an individual. According to VantageScore, upwards of 2,500 lenders use its model, including 10 of the largest banks in the US. Still, most lenders look at FICO scores when making lending decisions.
It's possible to get more or less favorable lending terms depending on which scoring model is used. However, higher scores are considered better in both cases. So your best bet is to strive to keep your credit score up or build it if necessary.
Credit score vs. credit reportWhat's the difference between a credit score and a credit report? As mentioned above, your score is the three-digit number that tells lenders how likely you are to repay your debts (aka your creditworthiness).
Your credit report, on the other hand, is a detailed, comprehensive breakdown of your credit history, including the factors noted above. It shows any current or previous negative information for up to seven years, such as delinquencies, repossessions, and collections.
Lenders will be able to see your report upon running a credit check when you apply for a loan. This is what's called an inquiry, and it will show up on your report. You can check yours for free (without it affecting your credit) once a year from each of the three major bureaus. To keep track of your score and see your report more often, you might sign up on a free credit monitoring platform like Credit Karma.
The importance of monitoring your creditCredit is not something you want to brush aside. Whether you check it weekly, monthly, or biannually, the first step is getting into the habit of monitoring your credit. Besides knowing where you stand, you can also check for inaccuracies.
Further, maintaining a good, very good, or excellent score (670 and above) can benefit your finances in several ways.
Benefits of a high credit score:
- Better odds at approval
- Better interest rates
- Access to larger loans
- Easier to buy a house
- Smaller down payments required
- More favorable loan terms
- More flexible loan terms
If your credit score isn't where you'd like it to be, don't worry. With the right strategy and diligence, you can build it back up.
Here at CCCU, we help folks from all walks of life achieve and maintain financial health. Members of our Portland-based community credit union can get competitively low interest rates on mortgages, car loans, bike loans, personal loans, business loans, and Visa credit cards with no balance-transfer fees.
Low-interest lending from our community credit union
CCCU proudly serves members throughout the metropolitan area, including Multnomah, Yamhill, Clackamas, Columbia, Washington, Clark, Skamania, and Hood River counties. With three branches in Portland proper and one in Hood River, plus mobile banking and nationwide ATM access, we make it easy to manage your personal finances.
Join our credit union today, or contact us to learn more.