Being in the mortgage consulting and lending business, I am constantly reminded of the importance of credit scores and the enormous impact those little numbers can have on people’s lives. So this month, I want to offer a two-part series on credit scores. In this initial article we’ll just look at some basics, such as what a credit score is and how it’s calculated. Then I’ll follow up in part two by examining the importance of knowing and monitoring your credit score, including some actions (and non-actions) than can positively or negatively impact your individual credit score.

Part 1 – Understanding Credit Scores

First I need to apologize because the main title of this series, “How to Get a Perfect Credit Score,” was a bit of a trick to get your attention. I think there are many people interested in the secret to getting the perfect credit score – but the real secret is … nobody can get a perfect credit score. You will never get a perfect credit score because the credit bureaus that decide your score have intentionally made a perfect credit score unattainable. The bureaus are smart enough to know that if consumers figured out a bureau’s exact algorithm for calculating credit scores, many of those consumers would find clever and sneaky ways to manipulate the system and generate faulty credit scores that were not accurate indicators of true creditworthiness. Therefore, the bureaus are constantly changing their credit score algorithms to keep the rest of us honest. There are certain known actions that can help you earn a GREAT credit score, which we’ll review in part 2; but for now, just be aware that there’s no reason to get upset if you fall a little short of perfect, because you always will.

What is a credit score?

Your credit score is a numerical ranking that is calculated through an analysis of your credit history and current credit files. The score is an indicator of your ability and likelihood to pay loans, bills and debts on time, and is often referred to as “creditworthiness.” Each open credit account and owed debt is called a trade line. Whether you’re seeking a credit card, an auto loan, or a mortgage, lenders want to know how risky loaning money to you will be. Therefore, almost all lenders will order a credit report with your credit score before deciding whether or not to approve your loan or line of credit. You can think of your credit score as a numerical measure of how well you’ve managed money over a long period of time. But remember, your credit score is simply a snapshot at a given point in time and will change as your trade line activity changes.

Where do credit scores come from?

There are three credit bureaus that collect your credit history, and calculate and report your credit score. The oldest bureau, which is also the most prevalent in the southeastern U.S., is called Equifax, which currently assigns a credit score ranging from 334 – 818. Experian assigns a score of 320 – 844 and TransUnion uses a range of 309 – 839. 

When you borrow money, the lender will report your new trade line to one or more of the credit bureaus and provide your payment history on an ongoing basis. Your ability to properly manage your open trade lines is the basis of your credit history and subsequently, your credit score. For each trade line, the bureaus track several items, including:

• Type of loan or debt (trade line)
• Open date
• Current balance
• Minimum payment due
• Payment history
• Late payments and number of days late