What's a Credit Score? Really.

“Do you know your credit score?”

It’s a question you probably hear from time to time, and if you don’t know the answer, it can feel unsettling. It feels like people are talking about you, you don’t know what they are saying, but you know it could be bad. It’s like the worst part of high school.

But the reality is that it’s kind of a trick question. You don’t have just one credit score. It’s not like the SATs in that way. Most people have dozens of credit scores and they are used by different organizations for different reasons. This doesn’t mean that they aren’t important, rather, the credit scoring system is more nuanced and while you should know where you stand overall, and be aware of your credit scores, it’s important to keep it all in perspective.

Why So Many Credit Scores?

According to some estimates, the average American has somewhere around 35 credit scores, and they are used for a variety of different reasons. Most are designed to predict risk, and they are generally calculated based on data from one or more of the three major credit bureaus (Experian, Transunion and Equifax), but the purposes of the different scores may vary.

Broadly speaking, these types of credit scores are available:

Generic scores are designed to predict how consumers may repay a variety of different loans.

Industry scores are created to predict performance on certain types of loans. For example, there are scores specifically tailored to predict risk of missed payment an auto loans.

Custom scores are developed on a lender’s customer base and predict the likelihood of a consumer not paying as agreed with that particular lender. They are “customized” for the lender’s own specific customer base and purposes. Your credit card issuer, for example, would generate a custom score on your profile, yet would never share it with other entities.

Educational scores are created to show consumers how their credit standing compares to other consumers. The score that you’ll find in our free Credit Report Card is an example of an educational score, because it is used to educate you, the consumer, and not used by a lender to evaluate your creditworthiness.

Is one type of score better than the other? Not necessarily. Let’s suppose an auto lender purchases an auto industry specific credit score based on information in your Equifax credit file at the very same time that a credit card company requests one to evaluate you for a credit line increase. And at the same time, you order your own score because you are thinking about shopping for a new credit card.

The number that each of these two lenders—and you—get may be different. That’s because the auto lender is ordering a score tailored to predict how likely you are to pay back an auto loan. The credit card company may be using a custom score to evaluate how likely you are to repay the credit card you want from that bank. And your educational score may be designed to help you understand the strengths and weaknesses of the information in your credit reports, as well as how those compare to others. The same data is being used in all three cases, but the scores are different.

We’ve all heard the term FICO Score tossed around, but a lot of people are confused when it comes to what the company actually does. Let’s start by explaining what FICO isn’t.

FICO is not one of the major credit bureaus (Equifax, Transunion and Experian), which means that FICO does not actually gather data about individuals. Rather, the FICO mathematical formulas are applied against the data from the credit reporting agencies to calculate a score. Their claim to fame is the formula, NOT the information that gets plugged into it. FICO scores are the most widely used credit scores, but they aren’t the only game in town. VantageScore was created by the credit reporting agencies to offer lenders an alternative to the FICO formula. In addition, each bureau has its own proprietary scoring models.

For competitive and legal reasons, the various credit scoring models may operate on different scales. For example, here are the ranges for a few popular credit scoring models:

FICO: 300-850
VantageScore: 501-990
Experian Plus Score: 330-830

What Do These Credit Scores Actually Take into Consideration?

Now that you know there are a variety of credit scores, you might be thinking, “Why should I even bother trying to keep tabs on this stuff? I’ll never be able to keep it all straight.”

In one sense, you’re right. You’ll never be able to monitor ALL of your credit scores, but the fact of the matter is that there’s no practical reason to do that anyway. Almost all of the credit scores out there look at the same pieces of information, they just may evaluate them a bit differently. In the end, if you take advantage of an educational credit score you’ll be able to monitor the various ups and downs of your credit.

It’s most important that you are mindful of the basic factors that go into every scoring model (all of which you can track using Credit.com’s Free Credit Report Card):

Payment history
Debt (balances, available credit and the ratios between them)
Seriously negative information
Length of credit history
New accounts

That means the main things you can do to build, maintain or even improve your credit scores are similar, no matter which scoring model will be used. Those are:

Use credit. Credit scores can’t be calculated from nothing. The score needs to see a minimum amount of established credit and recent activity on your credit to be generated.

Pay your bills on time. By reviewing your credit reports, you’ll know which lenders report to the credit reporting agencies, and you can be extra careful about paying them on time, every time. Keep in mind that some lenders only report negative information. That means that even a lender who doesn’t report positive payment history may report if you fall behind.

Try to stay out of trouble. Tax liens, judgments, foreclosure, collections and bankruptcy are likely to result in a credit score drop, no matter which model is being used to generate a score. If you can’t avoid these kinds of problems, try to find a way to resolve them so you can shift your attention to rebuilding your credit.

Keep debt levels (especially on credit cards) low, if possible. FICO has said that consumers with the best scores tend to use, on average, 10% of the available credit on their credit cards. When you do charge items on your cards, feel free to pay off the balances in full each month. That’s won’t hurt your credit scores, and can save you money on interest charges.

Shop carefully for new credit. While a single inquiry into your credit or a new account won’t ruin your credit scores, they can have an impact. That’s especially true if you apply for multiple credit cards in a short period of time, for example, or open a bunch of new accounts at once. As FICO representatives are fond of saying, “Be a credit grazer, not a credit gorger.”