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When you’re applying for a traditional loan, looking to rent an apartment, or trying to get utility service, it’s likely that your lender, landlord, or provider will run a credit check. In other words, credit checks are an unavoidable part of life.

But what does a credit score really mean? There are a variety of components that make up your credit score and it’s important that you understand the way they work so you know your likelihood of approval for something you really want (like an auto loan or mortgage). It’s equally as important to know how to repair bad credit so that you aren’t haunted by a low credit rating forever.

Before we dive into the finer details, let’s talk about the basics of credit scores.

What Goes Into a Credit Score?

Your credit score is calculated from a few different factors, including:

  • Your payment history: If you usually pay your bills in full and on-time, or if you have late payments and balances that carry over each month.
  • Credit utilization: Do you max out your credit cards every month, or do you leave plenty of wiggle room in your available line of credit?
  • Length of credit history: This applies to both the amount of time you’ve had active credit card accounts and the number of credit cards you have.
  • Credit mix: Debt doesn’t just apply to credit cards; it also applies to student loans, mortgages, and car loans.

All of these different factors are taken together in order for lenders to get an accurate picture of what kind of spender you are and how much risk you carry before issuing a loan.

Three’s Company

Your credit score doesn’t come from a single source, which also means that you don’t just have one credit score—you can have multiple credit scores. There are three major credit reporting agencies—Equifax®, TransUnion®, and Experian—and, depending on who is running a credit check on you (and where), your score may differ. This is because each of the three major credit bureaus may have different information about you, and discrepancies exist because not all lenders report to all three bureaus.

Additionally, there are two main credit scoring models that are used to calculate your three-digit credit score: FICO® and VantageScore®. The three different bureaus use both models and credit lenders can then choose which model they’d like to use when determining your credit score. Each scoring model can have multiple variations, including updates to calculations and custom calculations based on a lender's needs. This means that if you were to apply for a mortgage with two different lenders, you could potentially find that you have a different credit score between the two of them.

The challenge then becomes making sure that you keep your eye on all three credit reports to be aware of any discrepancies that may impact your credit score with each agency.

No Credit, Big Problem

One of the common misconceptions people have about their credit is that if they don’t have a credit card or any major debts, they don’t have to worry about their credit score. This is a dangerous misunderstanding, because “no credit” often means “bad credit” in the eyes of a lender

The reason your lender wants to run a credit check is for assurance is to make sure you are financially responsible and can pay back the money they give you. If you don’t have any credit, your lender has no idea whether you’re financially responsible or not, and you’re a much bigger risk. While it’s not impossible to get approved for loans without credit, it does require extra steps for you, and even higher penalties for missed payments than those with a good credit score.

Out of Sight, Out of Mind

Just because you haven’t checked your credit, doesn’t mean it’s not there. Everyone has a credit score—and you won’t know whether you have good or a bad credit until you look.