Some of my close friends know that I’m writing this blog. That means I get really pertinent questions. Sometimes I know the answer immediately, and other times I need to do a little research.
What is normal in credit score reporting?
There are three main credit rating agencies that monitor people’s habits by collecting information about their borrowing activity. Agencies receive the information when businesses report information about your payments. The agencies do not all get the information from the same businesses. Then the agencies each use proprietary criteria to assign credit ratings to consumers. In theory, the ratings indicate a person’s creditworthiness. The higher the score they give you, the more likely that you pay your debts in a timely manner. Agencies believe that loan issuers should trust you to make payments according to the terms.
There are a few generally shared Good Credit Habits agreed upon by the agencies. Positive things include the longer a borrower has accounts established, the amount of available credit being utilized, monthly on-time payments, the number of credit lines recently opened, the type of credit you use, and the total amount of your debt.
However, these agencies don’t agree on what factors matter most. They also will not tell individuals what precisely to do to improve your score.
What’s a good credit score?
FICO used to be the entire system and their scores range from 350-850. The higher the score, the better your credit.
- 720-850 Excellent Credit
- 690-719 Good Credit
- 650 – 689 Fair Credit
- 350 – 649 Poor Credit
Two of the three agencies use something called the VantageScore on top of the FICO score. The VantageScore range is 501-990 and uses letter grades. Anything over 900 is an A, and a good credit risk.
This leads to a strange thing for individuals, namely that different companies will have your score at different levels. This is easier to see now, because many credit cards are adding credit score monitoring as part of their perks. Thankfully, this additional monitoring by your credit card company does not count as a ding against your credit. It is not harming you, but the information may not be as accurate as you’d like if you are using it as a planning tool for preparing yourself for a loan. If you pull your credit report, the score listed could be different from what your credit card company is telling you. Each reporting agency has different businesses providing them with data about you and give different weight to the factors. It is not uncommon to see a 50 point difference in score from different companies. This only got more pronounced after the advent of VantageScore, which uses a different scale entirely.
The value of a good credit score is in the percentage rates you receive on loan terms. It impacts how much you actually end up paying for the privilege of receiving the credit. Fair and Good credit are almost misnomers today. After the 2008 crash, lenders tightened up how they provided financing. It is really hard to get a loan with favorable terms without credit at the 720 level or higher.
Scores can change rapidly. Between April and the end of June, my score rose 55 points from the high-end of Good to firmly Excellent category. However, during July, I initiated a balance transfer from one card to another, because I was offered a 0% APR on balance transers for a year. I was excited for the breathing room, but my FICO score dropped 44 points. I knew there would be a ding, but I did not know it would be quite so significant. It was frustrating, but then I remembered that I am not in the market for a new mortgage or access to credit for at least a year. I have time to rebuild.
Do you think credit scores are useful data points even with the changes in the past few years?