credit & debt

6 Things to Know About Credit Scores

FICO isn’t the only number in town. The score that counts is the one your lender uses.

1. There is no single number.The compilers of the widely accepted FICO credit score allow lenders to customize their system, so different lenders produce different scores. Plus, each of the credit bureaus—Experian, Equifax and TransUnion—has a proprietary scoring model. As if that weren’t enough, the credit bureaus together invented VantageScore a few years ago to compete with FICO.

2. Different scales, different scores. FICO scores range from 300 to 850. You’ll need about 760 or better for the best mortgage rates, but a score of 720 should be sufficient to get you the best deal on an auto loan. About 10% of lenders now use VantageScore, which ranges from 501 to 990 and has corresponding letter grades from A to F. The best rates go to borrowers with scores in the A range (above 900). If you are denied a loan or given less than the best rate, a lender must tell you the score it used, along with the corresponding range and factors that adversely affected your score.

3. Do a credit checkup. You can monitor your credit yourself by requesting a free report once a year from each of the credit bureaus through www.annualcreditreport.com. But the free report won’t include your credit score; you’ll pay about $8 to get the credit bureau’s proprietary number. The majority of lenders (especially mortgage lenders) use FICO scores, however, so if you’re in the market for a loan, that is the one you want. At www.myfico.com, you can get your credit report and a FICO score from Equifax or TransUnion (but not Experian) for $20.

4. Free doesn’t always mean free. If you are just looking for a ballpark estimate of how you’re doing, go to www.credit.com. You’ll get free estimates of your FICO score and VantageScore along with Experian’s own PLUS score. Sites such as www.freecreditscore.com and www.creditreport.com, however, will give you a free PLUS score, but only if you sign up for a free trial subscription to a credit-monitoring service; if you don’t cancel in seven days, the service costs $15 to $20 a month. Likewise, at MyFICO.com, you can get your FICO score free, but only if you accept a trial subscription to the com­pany’s Score Watch system.

5. Maintain credit health. All of the scores measure the same factors from the information in your credit file, and they all indicate the same thing: creditworthiness. Try to keep your credit-utilization ratio low—that is, be aware of the amount of debt you have compared with the amount of available credit you have. A history of paying your bills on time helps. Having a variety of loans—for example, a revolving line of credit (such as a credit card), a car payment and a mortgage—will boost your score, too.

6. It’s a moving target. The information in your credit files at the bureaus is continually changing—and so will your score. If you’re about to apply for a loan, check your reports for mistakes that could impact your score. Pay down balances as much as possible. And if you’re not applying for a credit card or making a big-ticket purchase anytime soon, says Jason Alderman, a senior director at Visa, "it doesn’t matter what your score is tomorrow."

This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.

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