Why you should care about your credit score


By Jennifer Waters, MarketWatch

Last Update: 12:01 AM ET Mar 5, 2012

CHICAGO (MarketWatch) Your credit score is like a movie: the image is constantly changing.

Your score, which lenders use to assess your bill-paying ability, is in a constant state of flux and will vary from one credit bureau to the next, meaning you dont have one credit score, but many.

Your score can be updated every time theres a new piece of information, said Sarah Davies, senior vice president of analytics at VantageScore Solutions LLC. VantageScore is a credit-score model created by the three major credit-reporting bureaus, Equifax, Experian and TransUnion, which also use the FICO score created by Fair Isaac Co.

Roughly 70% of credit scores change by up to 20 points in a 90-day window, according to VantageScore. Consider your score a reflection of your credit behavior at a particular moment in time.

You could do something every other day, like pay a bill or miss a payment, and it might change every other day, she said. The reality is a lot of those updates are insignificant.

Your score is mostly determined by how promptly you pay your bills and what kind of debt you carry, though other factors also feed into it. For example, a mortgage holds more weight in the scoring system than a handful of retail accounts, so timely mortgage payments are more important. A car loan, which also carries more heft than a retail card, can be a big help in building a promising credit history.

Your credit score may be as important as your education and your job skills because it helps you navigate your lifestyle. Its taken into account when you buy a house, a car or insurance, and when you seek credit for a small business. Increasingly, your score can help you land, or lose out on, a job, an apartment or utilities.

People with higher scores enjoy lower interest rates and bigger loans. Poor scores can mean high interest rates and less favorable terms. But mining your score on a monthly or daily basis wont improve it.

Consumers should be credit managers, not credit-score managers, Davies said.

Whats important is that your range of risk what lenders consider key to determining whether youll make timely payments is acceptable. But that risk assessment isnt consistent from lender to lender. Auto lenders, for instance, use a different algorithm than a mortgage lender or retailer might.

Whats more, scores vary because the three largest credit bureaus dont have the same information. Lenders dont report all the same things to all the credit bureaus, which is why scores will vary, said Beverly Harzog, a credit-card analyst with Credit.com.

Also, the two main scoring systems use different point ranges: FICO, which has been around since the late 1950s and is the most widely used, scores in a range of 300 to 850, while VantageScore, introduced in 2006, uses 501 to 990.

Still, experts say the range of risk will be about the same if your score is, say, 800 on FICO and 900 on VantageScore. What matters is which scoring system your lender uses and where you fall on that. If your FICO is 700, dont confuse that with 700 on the VantageScore, which puts you in a lower credit category.

The range of risk will likely be in the same place, no matter what scoring model you use, says Maxine Sweet, vice president of education at Experian.

Scores will vary, too, based on when lenders report to the credit bureau. Some banks may report your payment behavior to Experian at the beginning of the month but give it to TransUnion midmonth.

A free annual report from each of the Experian, Equifax and TransUnion, which you can get through annualcreditreport.com, will include details on your bill-payment history, but not your credit score, which is what you should care most about. Youll have to pay for your score, though its generally under $20.

Dont worry about your scores changing unless the moves are dramatic. If your score changes significantly, either you made a financial misstep, such as missed a payment or, worse, someone copped your identity. A little movement here or there is normal, Harzog said. But a big movement could be your first alert of identity fraud.

Heres what you should worry about and how to fix it:

  • Purchase a credit score at least once a year, Sweet said. You need to know where you fall in the range of risk and what in your credit history increases that risk, she said.
  • If you dont have enough history to score well, consider taking out an auto loan one you can afford or another loan for a big-ticket item to help build a credit record.
  • Dont try to manage your score on a daily or weekly basis. If you wait for the full 30-day cycle, all your information will have updated and will be the best representation. Otherwise it will drive you crazy, Harzog said.
  • If you want to purchase a home or car in the next year, look at your credit score now and make moves to improve it by paying off debt in a timely manner.
  • Your credit reports may contain errors. If you contest something in your report, it freezes that information until a decision has been made.
  • A foreclosure or bankruptcy filing will lower your score significantly and for seven to 10 years. A missed mortgage payment will set off alarms, especially if your payment history has been pristine until then, but a late credit-card payment can be more easily fixed by consecutive months of good payment behavior.

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