How Credit Scoring Works

Knowing the basics about credit scores and reporting will help you develop smart credit habits and make effective decisions for your financial future. Over time, these good credit habits and decisions should have a positive impact on your credit score. Healthy credit will help you participate more fully in the modern economy and enable you to take advantage of the credit opportunities you desire.

Credit scores

Credit scores are calculated using information in your credit report. That information is added to your report when companies, such as lenders, banks and utility companies, report your account information to the credit reporting agencies. Scoring models then use categories of information in your reports to calculate a three digit score. Popular scoring models provide credit scores ranging from 300 to 850.

What your credit scores mean

Your credit score provides a snapshot of your credit health to lenders, which can help them make a lending decision. Companies may have different criteria for extending credit, so a score that may get you approved with one lender may not be the same for another. In general, the higher your score, the more likely you’ll be approved and get better terms on credit products, which can save you money over time. In some instances, like mortgages, your credit score may not be the only thing lenders look at before offering you credit.

There are different credit scoring models

When checking your credit scores, you may notice they are slightly different depending on who provided your score. This is because there are different scoring models. The model used by your bank or lender may be different than the one used when you get your score from TransUnion. Scoring models tend to look at similar factors, but can weigh those factors differently in their formula, which may account for some variation in your credit scores.

Common factors used in credit score models include your payment history, how much of your available credit limit you’re using (credit utilization), the types of credit you have, the length of your history and if you’ve opened any new accounts recently. For example, a VantageScore® 3.0 credit score, which is the score you see when you check it on TransUnion’s site, puts the most emphasis on payment history. Other models may prioritize other factors.

Why your credit scores change

Your credit scores can change as your lenders provide updated information to the credit reporting agencies, which then appear on your credit report. If information in your credit report changes based on what lenders provide and it’s related to one of the credit scoring factors, your scores may reflect that. For instance, if you pay down credit card debt, it could help your score if it lowers how much of your available credit you’re using. The important thing to remember is that if your score changed, it means something in your report probably did as well. If you’re not sure why your score changed, check your credit reports to determine the cause. 

It’s important to know that you can’t dispute you credit score since it’s based on the information in your report. However, if something in your credit report is inaccurate, you can dispute that information. This can help ensure your report, and in turn your score, are accurate and up-to-date.

Building the habit of consistently monitoring your credit is a crucial part of managing your credit health. But try not to get caught up in minor changes to your credit scores month-to-month. Your credit score can fluctuate frequently. You can earn the credit score you want with consistent good habits that help build a healthy credit history over time.