If you’re an adult in the U.S., there’s a good chance you use a credit card (or in some cases, multiple credit cards) for the majority of your purchases. As a credit card holder, you’re assigned a unique number—a credit score—that credit card companies and lenders use to determine how much of a risk it is to give you a line of credit or loan you money. The tricky thing about credit scores is that having a bad one might hurt your ability to open new lines of credit, get approved for a lease or mortgage, or even get a debt consolidation loan. It’s easy to see how this might be a slippery slope.
Because the rules surrounding credit scores are so nuanced, understanding your own credit score and how it’s determined can be flat out confusing. Let’s explore these esoteric rules and calculations.
Your credit score might differ depending on who you ask
There are three major credit bureaus: Equifax, Experian, and TransUnion. Because they operate independently from one another, each might have a different opinion of your credit, depending on when and where a credit inquiry is made. Not every credit card company, bank, or agency deals with every credit bureau, and all three bureaus have their own criteria and weights for determining a credit score. These differing numbers can cause new or inexperienced credit card users to not fully understand—or completely misinterpret—their own credit score.
The ranges and language surrounding credit scores feel really random
The two most commonly used credit score models come from the Fair Isaac Corporation (FICO) and VantageScore. Scores range from 300 (worst) to 850 (best). Your credit score goes up or down based on factors like making payments on time, how long you’ve had a line of credit, and how much of your available credit you use. This all seems pretty straightforward, but why a scale from 300 to 850? Why not something that most people are more familiar with, like a simple 1 to 100 scale?
To make things even more confusing, FICO and VantageScore use different language and ranges to quantify the different tiers of credit scores. For example, VantageScore categorizes any score over 750 as “excellent,” while FICO only gives the gold star to scores over 800. Plus, each model labels their tiers differently, with FICO’s tiers consisting of “exceptional, very good, good, fair, and very poor,” and VantageScore’s consisting of “excellent, good, fair, poor, and very poor.” Putting aside the fact that words like “good” and “fair” can sometimes be subjective, inconsistencies with the language surrounding your credit standing can be misleading. A score of 570 will land you in FICO’s “very poor” bottom tier, while the same score places you in VantageScore’s “poor” second-lowest tier.
Your score can go down after you pay off a loan
Sounds counterintuitive, right? Why on earth would your credit score drop after you finish paying off a large sum of debt—say, a student loan? If anything, shouldn’t that improve your score because you’re literally showing that you have the ability to pay back a loan? You can get a debt consolidation loan.
Listen, we totally hear you. But your credit score is also unfortunately based on factors like the average age of your open accounts and your “credit mix.”
When it comes to age of credit, if you pay off an old loan, that account closes and no longer counts toward your credit’s age—potentially lowering the average and making you seem more risky to lenders.
For credit mix, having a blend of revolving lines of credit (like credit cards) and installment accounts (like personal or student loans) can actually help your score. So, when you pay off a loan and close that debt account, your credit mix can suffer and so can your score.
Your income and ability to pay bills on time play no part in your credit score
Your income doesn’t actually appear anywhere on your credit report. While it’s safe to assume that someone with a higher income would have an easier time making payments on time, creditors want their customers to put their money where their mouth is—or, more precisely, where their bills are. Unless you’re paying your monthly bills with a credit card and then paying that credit card off, things like paying your rent every first of the month or setting up your checking account to autopay your Netflix subscription won’t directly influence your credit score.