Good credit is an essential part of your overall financial health. As a smart consumer, you probably already know that paying attention to your credit scores is important. Without good credit you can expect to pay more for the things you need. Without good credit you may be denied for loans, credit cards, and even housing.
Thankfully, more and more people are beginning to understand the importance of good credit. Still, even if you understand the need for earning good credit, there are common credit myths which could trip you up or leave you feeling confused. The subject of credit scores, especially, is surrounded by myth and misinformation.
Credit Score Myth Vs Reality
Contrary to a lot of bad information floating around on the internet, you do not have just one credit score. You don’t have just three credit scores either (one from each of the major credit reporting agencies—Equifax, TransUnion, and Experian). The reality of how many credit scores you can have may surprise you.
Instead of just one or three credit score possibilities, you actually have hundreds of different credit scores.
Credit scores are primarily created for the purpose of helping lenders, insurance providers, and other companies to predict risk—the risk of lending you money or taking you on as a customer. A credit score is essentially a grade which represents how well you have managed your credit in the past, based upon the information contained in your credit reports.
The healthier the information which appears on your credit reports, the better your credit scores will generally be.
Why So Many Credit Scores?
Credit scoring models—such as those created by FICO and VantageScore evaluate the information contained in your credit reports and assign a number which indicates your risk level. Other companies then use that number to make better informed business decisions.
The reason so many credit scores exist is because different credit scores serve different purposes. Different scores may also evaluate different types of data. To top all of that off, all those different credit score brands may come in a variety of versions and types.
Here’s a breakdown to explain how it all works.
1. Different Purposes
FICO scores and VantageScores are designed to predict how likely it is that you will become 90 days late on any credit obligation within the next 24 months. Credit-based insurance scores, on the other hand, are designed to predict the likelihood that you will file a claim.
Educational credit scores, like many free credit score offers or some of the credit monitoring services you may find online, might not be used by lenders at all. Rather these scores are designed to help you as a consumer track the health of your credit in other ways.
2. Different Data
Credit scores may also be based upon slightly different types of data. Most are based upon the information contained on your credit report, but the data on your three credit reports can vary somewhat from credit bureau to credit bureau. Some scoring models may allow you to opt in and have other types of data considered as well.
The UltraFICO Score, for example, allows you to link your bank account information along with your Experian credit report for another type of scoring evaluation. Experian Boost is similar and allows you to opt in to have utility bill information considered by a FICO scoring model.
3. Different Brands, Types, and Versions
You already know from above that there are different brands of credit scores (i.e. FICO, VantageScore, credit-based insurance scores, credit bureau specific scores, etc.). These credit score brands may also come in different versions and varieties.
For example, a FICO score can come in several industry specific varieties. There are mortgage specific FICO scores, auto loan specific FICO scores, credit card specific FICO scores and general use FICO scores. There may also multiple versions (think 1.0, 2.0, 3.0, etc.) of many different credit scoring models.
When you add together all the different brands, types, and versions, the result is the hundreds of different potential credit scores mentioned above.