While most people are aware that their credit scores are important, particularly when it comes to making larger purchases or getting loans, there are a lot of misconceptions out there about how these credit scores work, how they are calculated and how they matter.
Here and in a few upcoming parts of this blog, we will take a closer look at some of the most common myths associated with credit scores and then provide the truth behind these misconceptions. Having a firm grasp on what your credit score is, how it is determined and how it matters can help you work towards getting (or keeping) a good credit score, which is essential to staying in good financial standing.
Myth 1: There is only one type of credit score.
Wrong! There are several different models that lenders may use to calculate credit scores, which means that the exact number of your score can vary from lender to lender. What really matters when it comes to your credit score is:
- Where your score falls on the spectrum of bad to moderate to good scores (i.e., in what range does the number lie in)
- What factors may be negatively impacting your credit score.
Although different lenders may use different means to calculate a specific credit score, the negative impacts to your score will typically not vary from lender to lender. Therefore, these are the things to focus on and try to resolve if you are attempting to improve your credit score.
Myth 2: The three credit bureaus determine my credit score.
Again, wrong! The credit bureaus – Experian, TransUnion and Equifax – are merely credit reporting bureaus. This means that they maintain and report the details of your credit history (which may include, for instance, any debts you have not paid, any late payments you have made, any credit cards you have ever taken out, etc.). The entities that do the actual calculating of credit scores are companies like FICO and VantageScore Solutions.
These credit scores are meant to be easy ways for lenders to predict how likely you will be to pay back future borrowed money. For instance, while a lower credit score may indicate that you are more likely to have trouble paying back borrowed funds, higher credit scores tend to indicate the opposite to potential lenders.
Look for our upcoming second and third parts of this blog for additional information regarding common myths about credit scores and the truth behind these misconceptions.
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