The 3 Most Important Numbers in Your Life

By Katie Martens

In this article we will cover:

• How credit scores are calculated

• How credit scores are used

• How to build credit

What are credit scores?

A credit score is supposed to predict how likely you are to pay a loan back on time. It gives a metric to banks to determine who might be a good person to lend to, and who may not be a good candidate for a loan. Here’s how credit scores are typically used:

• Landlords use credit scores when deciding whether to rent to a potential tenant.

• Insurers can use your credit score to set your insurance rates.

• Employers can use your credit score to determine whether to hire you.

• Lenders use your credit score to determine your ability to pay back a loan like a mortgage.

The Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) are arms of the federal government, tasked with protecting consumers. Both of these government agencies provide oversight to credit reporting companies. The three largest companies that create and maintain credit scores are Equifax, Transunion, and Experian. These three, along with a multitude of other companies creating credit scores, use their own mathematical models to determine what your score is.

There isn’t a hard and fast rule on how your credit score is calculated and maintained - you may get one number from Equifax that looks noticeably different from Transunion on the same day. It’s normal to see different numbers because scores are calculated at different times, in different ways.

Generally, your credit score is calculated by looking at your credit history. Your credit history describes how you use money. The formulas try to answer questions like…

1. How many credit cards do you have?

2. How many loans do you have?

3. Do you pay your bills on time?

There are lots of different scoring systems, but most factors that are used in most calculations are:

• How much money you owe

• Whether you’ve paid on time or late

• How long you’ve had credit

• How much new credit you have

• Whether you applied for new credit recently

Then, using a statistical program, companies compare this information to the credit behavior of people with similar profiles. Based on this comparison, the statistical program assigns you a score. Usually, credit scores fall between 300 and 850. A higher score means that you have “good” credit, and a low score means you have what businesses see as “bad” credit, which means it will be harder for you to get a loan or credit card.

As discussed earlier in this article, how you handle your money in your credit history will help lenders decide if they want to do business with you.

Like many things related to the economy and money, trust and confidence are key. If the potential lender looks at your credit history and can see that you pay your bills promptly, it boosts the lender’s confidence that you’ll be able to pay back your loan. This is considered a “good risk” for lenders - your past actions with money suggest you can be trusted to take care of it.

Who is in charge of maintaining and providing credit reports?

You can view the data that is used to calculate your credit score on a credit report, which is a compilation of your credit activity data. However, there isn’t one, universal credit report. Generally, if receiving a credit report from one of the three big credit reporting bureaus (Equifax, Transunion, or Experian), you’ll find information like:

• Your name, address, and social security number

• Your credit cards

• Your loans

• How much money you owe

• If you pay your bills on time or late

• If you filed for bankruptcy

You can get a free report from one of the big three national agencies, or pay for one through other companies. Remember: you have the right to ask for these reports once a year, and it will not hurt your credit score by asking.

The big three agencies are Equifax, Transunion, and Experian. Under the Fair Credit Reporting Act (FCRA), you are entitled to receive 1 copy of your credit report once a year from Equifax, Transunion, and Experian. Be sure to use this link to request your 1 free copy.

The FCRA requires that the credit reporting companies make sure that the information they collect about you is accurate. If you find mistakes, like a wrong alias or wrongly attributed debt, you can dispute them.

How to maintain & improve your credit score

While it’s important to look out for mistakes or fraudulent activity on your credit score, it’s just as important to maintain a good-looking credit score. Here are five steps to take to ensure your lender’s eyes light up with delight when they check your credit score:

1. Pay your loans on time, every time

2. Don’t use your entire credit limit, aim to use 30% or less

3. A long credit history will help your score, don’t close old accounts

4. Only apply for credit that you need, and do it rarely

5. Fact-check your credit reports