You might think you’re doing everything right in regards to borrowing money and repaying loans — and still be unhappy with your credit score. There are three national credit bureaus in the US, and each produces a score that lenders rely on when deciding whether to lend you money or how much interest to charge. To find out what you can do to try to improve your borrowing capability, it’s important to know what goes into each score and how you can affect it.
What is a credit score used for?
A good credit score typically allows you to have better interest rates and term rates. Likewise, a low credit score might prevent you from qualifying for some loans and even make it more difficult to convince a landlord to rent to you. Your scores from the three credit bureaus — Equifax, TransUnion, and Experian — may vary slightly but usually they are close because they are based on your actual finances. Each bureau gives slightly different weight to components of your lending performance but there are important factors to keep in mind for all of them.
There are also two main types of credit scoring models. One is FICO and the other is VantageScore, and they offer slightly different models depending on the type of loan — auto vs. mortgage, for example.
This is what the credit scores reflect
Five main components make up most of your credit score and it comes down to how you have used credit in the past. The number of loans you have taken, whether you paid them off on time, and how you use your credit cards all are some factors that play a role.
These are the elements that affect your score and that every consumer should pay attention to if they plan to borrow money:
- Your payment history is a record of how often you pay your bills on time, and it makes up 35% of your score. Missed or late payments affect your score negatively, while on-time payments could result in a higher credit score.
- Your credit utilization is the percentage of the total available credit you use every month and makes up 30% of your score. Try not to make purchases on a credit card that equal more than 30% of your credit limit.
- Creditors look at your history of managing credit. Length of credit history is 15% of your score.
- Creditors like to see that you have experience managing a few different types of credit, like credit cards vs. personal loans. They give it a weight of 10%.
- New credit inquiries are also weighted at 10%. Opening several new credit accounts over a short period of time could negatively affect your credit score.
Errors on reports
Errors on credit reports do happen and they could make your score go down. If only one credit bureau has the error, that score could be much lower than the other two. It is important to dispute any errors to ensure your score actually reflects your credit risk and is calculated fairly.
Steps that could improve your score
Whether you need to create a lending history or show you are a better credit risk than in the past, a MoneyLion Credit Builder loan could help.
Qualified applicants to Credit Builder Plus can borrow up to $1,000 and pay it off over a year to help build their credit history. More than half our members raised their score by up to 27 points within 60 days.1 The maximum loan amount is $1,000, and you will receive some of the funds soon after you are approved for the loan. The remaining funds get stored in a Credit Reserve Account. MoneyLion users must become Credit Builder Plus members to obtain this loan. The membership costs $19.99/month, with opportunities to claim rewards that will allow you to recoup the monthly fee.2 When you pay off your full loan amount (which includes the amount given upfront, the amount in your Credit Reserve Account, and any interest accrued), you will be able to withdraw your money saved in the Credit Reserve Account.3
Maintaining a good credit score helps when it comes to your financial health. Practice good budgeting habits and check out Credit Builder Plus.
Which credit bureau is most used?
It is a good idea to ask the lender what credit bureau they use. Auto lenders most often use Experian and Equifax but as a consumer, it is important to make sure your credit is as healthy as possible.
What kind of score do I need when I want to buy a house?
Many factors in addition to credit score go into obtaining a home mortgage. Research the requirements of several banks or mortgage lenders and then meet with some to determine what they consider in the process.
How much does it matter when my scores from the three bureaus are different?
The three scores should be close. If one is much lower, check to see if some misinformation was reported to that bureau.