There is so much available information today about credit, credit score, accounts, types of credit, and much more. The amount of information can make it a little confusing exactly what you are reading since most of this info comes from the bureaus and they tend to keep the information they present relatively subdued in order for you to browse their sites to sift through endless words and phrases. Let’s make it simple and paint the correct picture of what credit is, how your scores are calculated, and why your credit is so important.
The History of the Credit System
Credit may seem like a relatively new system integrated into today’s society, however, credit has been around historically for centuries. The first documented form of credit system is in the 1800s when credit was based on a person’s reputation, word of mouth, rather than tangible receipts. Historically, this left more negative consequences than positive ones, as shopkeepers and merchants controlled who can get what and the rate they can get it at. Although documented in the 1800s, it is not hard to believe that systems comparable to this were used in even ancient times, during the Roman empire, Persian conquests, and even further back in time.
Today, there have been many changes to dated credit systems. Due to technological advances and more easily accessible information, the credit system today has been solidified and continues to make adjustments to improve it.
The credit system today has made tremendous strides in comparison to its historic applications. Today, credit is designed to show how well an individual is at paying back borrowed money, over a very long period of time. The better an individual is at paying back that money on time, the more “credible” and “creditworthy” the individual becomes. The more credible a person is, the more likely this person will be accredited with more lines of credit in the future at much easier to pay interest rates.
An individual’s payment history is documented by the creditors, who are the lenders, banks, or financial institutions that extend lines of credit over to individuals. These lines of credit are given by the creditors based on the applicant’s current credit standing. More often than not, creditors are not willing to work with individuals who have a low credit score or subpar credit report, because to them, that individual will be seen as a financial risk.
The reported payment history and activity of your account with a creditor are forwarded over to three nationwide bureaus:
These three major bureaus are responsible for displaying the history you have with a creditor on a report that is displayed. This is called your credit report and is used to showcase your payment history with any accounts opened under your name so that other creditors can inquire about your account history before extending you a line of credit.
The major bureaus are for-profit companies, meaning they purchase and sell your information to anyone who wishes to view it. This has resulted in a bit of an uproar knowing that anyone’s information can easily be viewed at the right price. Although it seems scary, it is better to know that people are paying significant money to view your report rather than being able to access it absolutely for free.
Your Credit Scores
Credit scores are probably the most talked-about subject on the internet. From ads on how to boost your credit score with Experian Boost, to the endless ads from Credit Karma and Credit Sesame to view your credit scores and see live changes. What these companies don’t want you to know is that your credit score barely makes any impact on the final decision of whether you get approved or not.
This is not to say your score doesn’t matter, because it does. Many lines of credit available to apply and obtain due require a minimum credit score threshold to even be considered. But although you may be able to meet the minimum score, the main purpose creditors “inquire” about your credit report is to visually see the account statuses that have resulted in your score calculating the way it is.
Your credit score is only a reflection of everything being displayed on your credit report. Your credit report will be the final decision maker whether or not you will get approved for the line of credit you are attempting to obtain. Why is that you may ask? Let’s give an example.
Let’s say, you are relatively new to credit, have your first credit card, a car loan with 2 on-time payments under your name, and are added as an authorized user on one of your parent’s credit cards. Your scores may be extremely strong, maybe even in the 800s, which is great! The only problem is when applying for a home, your credit may look too new to truly gauge your creditworthiness. You may get denied even if you make enough money and even have a great credit score, but because you haven’t obtained additional lines of credit and can only showcase a very limited history of on-time payments. Regardless of your score, the banks will still see that as a risk on their end and will opt out of approving you a line of credit, especially ones the size of houses.
The Different Scoring Models
The most downloaded credit app today is Credit Karma which is closely followed by the Experian app. More often than not, people tend to download both apps and start getting really confused when looking at Equifax and TransUnion on Credit Karma and seeing a decent score, and then looking at Experian to see a score of 50, 75, or even 100+ points lower. Why is that?
Well, the answer is actually quite simple and is overlooked due to the shock of how low your score looks on Experian compared to Credit Karma. It is not because one score model is wrong and one is right. It is because you are looking at 2 completely different scoring models.
Credit Karma has been given an extremely negative stigma that it is “inaccurate”, “false”, or “wrong”. That statement is unfortunately false. Your Credit Karma scores are relatively accurate, however, it is showcasing your Vantage Score 3.0. Your vantage scores are used to obtain sources of revolving credit, which comes in the form of credit cards and very rare revolving loans. These scores are used primarily to determine your creditworthiness in order to obtain additional credit cards.
Experian on the other hand showcases your FICO Score 8.0. Your FICO scores are used to obtain sources of installment credit, which comes in the form of loans. So any car loan, boat loan, home loan, business, or a personal loan will be using a FICO scoring model to check your scores and reports. Typically, your FICO scores will be lower than your Vantage scores due to the different values items have on your reports.
It gets a little complicated from here so make sure you are seated and reread through this section a few times. There are 9 current FICO scoring models, with a 10th model set to release this year. Across 3 major bureaus, you technically have 27 different FICO scores, each one calculating items slightly differently, which in turn shows slight deviations in each score. This does not mean that your reports are different, every item on your report is still reflected regardless of the score or model being used.
For Vantage scores, there are currently 4 different scoring models. Across the 3 major bureaus, you technically have 12 different scores available. Although there are plenty of models to choose from, it is solely dependent on which bank is inquiring about your credit through which bureau and the model they select to choose from. It does also depend on what line of credit you are trying to obtain, so don’t fixate on your credit scores, fixate on your credit reports and your account history.
Best Credit Monitoring Apps
With so many websites, apps, and credit reports to purchase from, which one should I go with? That is a great question to ask and we have the best 2 options available for you.
When it comes to your Vantage Scores, the best option to select is Smart Credit. Smart Credit showcases all 3 of your Vantage Scores from Experian, Equifax, and TransUnion. They also have an app that is a bit more user-friendly than Credit Karma. Although Credit Karma is free and useful, they tend to send some information your way in hopes you apply to the credit cards they recommend to you or read their articles to sway your opinion into making an unnecessary decision. Credit Smart keeps it simple, showing you your reports, your scores, and the issues you are having on your report, including any alerts of your score dropping or any potential fraudulent activity.
If you are looking to view your Vantage Scores, unfortunately, Experian is not the best possible app. The app you are looking to use is MyFICO. This app is the ultimate FICO score app, showing you your extensive reports from all 3 bureaus, and has 1 feature that trumps every single FICO scoring app available. You can view every single score, from every single model. This will help you be much more informed about where you stand on each model, as well as the app illustrates which scoring model is used for which type of installment credit. The information on this app is extremely extensive and will give you an extra layer of confidence when applying for your next loan.
There is an extensive amount of information available today about credit, how to fix bad credit, and even how to understand what goes into your credit. The most important thing to understand about your credit is your credit score is not the deciding factor of you getting approved or denied when applying for a line of credit. Your score is only a reflection of everything on your credit report. From payment history to the age of the accounts, to even the amount of accounts on your report, everything is taken into consideration before extending lines of credit. Make sure you know what is on your report before making any rash decisions to improve your credit scores. In some instances, your scores may be low due to negatively impacting items on your credit report. If that is the case, definitely look into disputing negative items on your own or hiring a reputable Credit Repair Company to bring your credit report and scores into a much stronger standing.