What Is A Credit Score Recipe?
Have you ever wondered what goes into a credit score recipe, how it is calculated? In other words, how can something as complex as an individual’s credit history be represented simply by a three-digit number?
This is a great question. Therefore, it is something worth further explanation. As a matter of fact, the credit scoring system has only become prevalent since the 1980’s as a way for lenders to quickly evaluate a potential borrower’s creditworthiness. Today, credit scoring is used by lenders, landlords, and utility companies to evaluate your credit behavior.
Here’s an easy way to think about credit scores: they’re like pies. Similar to a recipe for a pie, the recipe for a credit score calls for the blending together of numerous ingredients to form a resulting product. Tastier pies have better ingredients. So do more palatable scores.
So What Are Those Ingredients, Anyway?
Using VantageScore® 3.0 as an example, let’s look at 5 of the main ingredients that factor into your credit score:
Let’s face it, if someone has a consistent history of making payments on time, they should probably be perceived as less of a risk than someone with the same exact credit profile who only has an intermittent history of on-time payments.
This is the amount owed. Reducing Outstanding Debt is always in the best interest of your credit health.
Utilization measures the amount of available credit one is using. VantageScore® Credit Score recommends keeping balances below 30% of credit limit.
Credit Type & History
History again? Yep, all else equal, someone with a longer and diversified credit history is typically seen as a less risky borrower. This fact reinforces the importance of establishing a solid foundation of good credit as early as possible.
Each time someone authorizes a lender or business to make an official inquiry of his/her credit in connection with seeking credit, the score typically drop a little bit. It is important to apply for credit in moderation.
What Does This All Mean?
Good credit scores and delicious apple pies have this in common: quality ingredients. So whether you’re borrowing or baking, what matters is what you put into it. In other words, for good results, a good credit score recipe is as important as a good apple pie recipe.
Therefore, when you are preparing for a major purchase make sure you check your credit scores and credit reports from all three credit reporting agencies: TransUnion, Equifax and Experian. In addition, looking at your scores and reports a few months before your loan application will also help you get a complete picture of your credit health.
This information is for educational purposes only and does not constitute legal or financial advice. You should always seek the advice of a legal or financial professional before making any legal or financial decisions.
Sources & Resources
What Influences Your Score (VantageScore Solutions, LLC);
The information for this post is from the site hosted and operated by TransUnion Interactive, Inc., a wholly owned subsidiary of TransUnion, LLC. Copyright 2017 TransUnion Interactive. All Rights Reserved.
The VantageScore Credit Score is provided to help you better understand how lenders view your credit report. It is not an endorsement or a determination of your qualification for a loan. Lenders use credit scores to help determine whether or not you are a good candidate for a loan and what interest rate you will pay. However, each lender has specific underwriting standards, so you should not assume that you will receive the same evaluation from each lender. As part of the underwriting process, they will incorporate additional information you provide and may obtain references. In addition, even if you are approved, the terms and conditions of loans vary from lender to lender. The information used to determine your credit score comes from one of the three major credit bureaus — TransUnion, Equifax and Experian. Credit reports are a compilation of credit information that is reported to the applicable bureau by the various lending institutions with which you have accounts. The information contained in your report reflects the latest information provided to the applicable bureau. If you recently made a payment, opened a new account, or authorized an inquiry, it may not yet be reflected in the credit report of any one of the bureaus you receive. Likewise, if the information is not included in the applicable credit report it will not be reflected in your credit score based on such report. Also, disputed items are not incorporated in the assessment of your credit score. Your credit score will change each time new information is captured in the credit report on which it is based. TransUnion Interactive is not connected in any way with Fair, Isaac and Company; the credit scores provided here are not so-called FICO scores. The VantageScore Credit Score may not be identical in every respect to any consumer credit scores produced by any other company.