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Many people believe that credit scores are based solely on FICO, but this is one of the biggest misconceptions about credit.
In fact, there are hundreds of different credit scoring models used by various industries, such as credit card issuers, lenders, mortgage lenders, accreditors, and merchants. And there are still several types and versions of FICO scores.
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Each credit scoring model uses a complex algorithm to assess a person’s risk, based on information from their credit reports at credit bureaus nationwide, such as Equifax, Experian and TransUnion.
The higher the credit score, the lower the risk of default, making it easier for a person to obtain credit or financing at a lower interest rate.
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Credit score and its special details
It is important to know the different credit scoring models and maintain a good credit history to ensure better financial opportunities.
Here are the limits for some common credit scores:
● For FICO mortgage scoring, the limits range from 300 to 850.
● For FICO car marking, the limits range from 250 to 900.
● The card’s FICO score also has a range from 250 to 900.
● VantageScore has a range of 501 to 990.
● And finally, the TransUnion verification has limits of 300 to 850
Each credit scoring model prioritizes different factors and has its own scoring scales.
For example, in an automatic scoring model, late payments on a car loan may carry more weight.
Although credit scoring agencies keep the exact formulas they use secret, FICO reveals that it uses the following factors and weights as a basis for calculating credit scores.
- Payment History (35%): Includes late payments, accounts in collections, and bankruptcies, and has a big impact on your score. Paying on time is essential to maintaining a good credit score.
- Amounts owed (30%): Also known as “credit utilization,” this refers to the amount of your debt relative to your available credit. Maintaining a low available credit utilization rate can increase your score.
- Age of credit history (15%): Refers to the length of time you have open credit accounts. Having old accounts can improve your score.
- New credit applications (10%): New applications for credit accounts may temporarily lower your score, as they indicate that you may be seeking too much credit.
- Range of credit types (10%): Having a mix of credit account types in your name, such as credit cards, car loans and mortgages, can help improve your score.
1. Your identity has been stolen
This is possibly the worst and most serious reason for a sudden drop in your credit score . If someone steals your personal information and opens an account or credit card in their name, the thief is unlikely to foot the bill.
Since payment history is a crucial factor in calculating your credit score, missing a single installment can instantly lower your score.
Check your credit reports for suspicious activity, such as accounts you don’t recognize and high balances on existing accounts.
However, if you have been a victim of identity theft, it is important to act quickly to minimize the damage.
Contact any creditor that appears on your credit report that you don’t recognize and ask to speak to the fraud department.
2. There is a misconception present on your credit reports
By carefully examining your credit reports for signs of fraud, you can identify other errors that could be the cause of a sudden drop in your credit score.
For example, incorrectly recorded late payments, outdated account balances, and outdated credit limits may be negatively affecting your credit score without you realizing it.
Start a dispute with each credit bureau that displays inaccurate information. Next, contact the creditor who reported the error and ask them to correct the information with the credit bureaus. Be prepared to provide documentation proving the creditor’s error.
The error may take one to two months to investigate and correct. Therefore, continue to monitor your credit reports to ensure the issue is resolved and your score is restored.
3. You accidentally missed a payment due date
As I mentioned above, payment history is the most important factor that credit scoring models use to calculate your scores. It is the king of credit, as it represents the largest percentage of a typical credit score.
When you pay your bills on time, it indicates that you are responsible with your money and suggests that your good financial behavior will continue.
On the other hand, having late payments or collection accounts is a sign that you are unreliable and may not pay your debts regularly or at all.
The consequences are harsh. Even a single late payment can dramatically lower your credit score, especially if you have good or excellent credit.
However, if you check your credit reports and find a late payment that shouldn’t be there, act immediately to correct the error.
4. Your credit utilization level has increased
As I said before, the amount of debt and credit utilization is the second most important factor in credit score.
Maintaining a low percentage of available credit on revolving accounts, such as credit cards and lines of credit, can improve your score.
On the other hand, using more available credit will cause your utilization rate to rise and your credit score to drop quickly.
What may be surprising is that your credit utilization can increase even if you haven’t reached your credit card limit. For example, if your card issuer reduces your credit limit, your utilization rate will increase.
You will have the same balance compared to a lower credit limit, making it less favorable to use for credit scoring models.
Card issuers set a spending limit when you open an account, but they can increase or decrease it depending on the terms of the contract.
5. The average age of your credit accounts has decreased.
Although keeping credit utilization low on revolving accounts is an important practice for establishing and maintaining good credit, it is equally important not to reduce utilization to zero.
You must have active credit accounts and use them responsibly to provide sufficient data to generate credit scores.
It is not necessary to accumulate debt month after month or pay interest to build credit. Instead, it is advisable to keep open accounts that show some activity, such as small occasional charges that are paid in full.
6. There has been a change to your credit account mix.
I’ve mentioned before that the age of your credit accounts is a relatively insignificant factor in relation to your credit score.
Credit models calculate the total number of months that all your accounts have been open and divide it by the number of accounts you have.
Having a long credit history can help lenders determine whether you are likely to be financially responsible in the future and a good credit risk. Therefore, the longer you maintain credit accounts in your name, the better.
When a credit account is closed or liquidated, the average age of the account begins to decrease. Closing an older account will have a more negative effect on your credit score than closing a newer account.
Additionally, opening a new account immediately reduces the average age of your accounts, which can lower your score.
7. You have made a large purchase on credit.
Although it is not the main factor in calculating your credit scores, having a variety of account types can help improve your credit scores.
For example, having revolving accounts, such as credit cards or lines of credit, along with installment accounts, such as car loans or mortgages, shows lenders that you can manage different types of credit responsibly.
If you’ve just paid off the only installment loan you have, your credit mix will appear less diverse to lenders, and there’s not much you can do about it unless you need to finance a major purchase, like a house or car. It is not recommended to get a loan just to increase your credit score.
If you maintain good habits, such as paying your credit card and utility bills on time and keeping your consumption rate low, your credit score will naturally increase over time.
