What Do Banks Use to Get Your Credit Score?
Your credit score plays a crucial role in determining your financial health. It affects your ability to secure loans, credit cards, and even impacts the interest rates you may be offered. Banks and financial institutions rely on this three-digit number to assess your creditworthiness. But have you ever wondered how they obtain this score? In this article, we will explore the methods banks use to get your credit score and provide answers to some frequently asked questions.
1. Credit Bureaus:
Banks typically obtain credit scores from credit bureaus, which are independent agencies that collect and maintain credit information about individuals. The most common credit bureaus are Equifax, Experian, and TransUnion. These bureaus gather data from various sources, such as lenders, credit card companies, and public records, to compile comprehensive credit reports. Banks request these reports to analyze your creditworthiness and determine your credit score.
2. FICO Score:
The most widely used credit scoring model is the FICO score, developed by the Fair Isaac Corporation. This scoring system ranges from 300 to 850, with a higher score indicating a lower credit risk. Banks usually rely on FICO scores to evaluate applicants for loans, mortgages, or credit cards. FICO scores consider factors like payment history, credit utilization, length of credit history, types of credit used, and recent credit inquiries.
While FICO scores dominate the lending industry, some banks also use VantageScore, a credit scoring model jointly developed by the three major credit bureaus. VantageScore ranges from 300 to 850, like FICO scores. It incorporates similar factors but may weigh them differently. Although less commonly used by lenders, VantageScore is gaining popularity due to its ability to assess individuals with limited credit history.
4. Internal Scoring Models:
In addition to credit bureaus’ scores, some banks have developed their own internal scoring models. These models are based on their experience and historical data of their own customers. These scores may consider additional factors specific to the bank’s lending criteria and preferences. However, these internal scores are less prevalent and usually used in combination with credit bureau scores.
5. Soft Inquiries:
Soft inquiries are another method banks use to get a glimpse of your credit standing. Unlike hard inquiries, which occur when you apply for credit, soft inquiries do not impact your credit score. Banks may perform soft inquiries to pre-qualify you for certain financial products or assess your eligibility for credit limit increases. However, soft inquiries do not provide as detailed information as credit bureau reports.
Q: How often do banks check credit scores?
A: Banks typically check credit scores when you apply for a loan, mortgage, or credit card. They may also review your credit score periodically if you have existing credit products with them.
Q: Will checking my own credit score impact it?
A: No, checking your own credit score does not affect it. This is considered a soft inquiry and has no impact on your creditworthiness.
Q: Can I improve my credit score?
A: Yes, you can improve your credit score over time by making payments on time, reducing your credit utilization, and maintaining a positive credit history.
Q: How long does negative information stay on my credit report?
A: Negative information, such as late payments or bankruptcies, can stay on your credit report for up to seven years, while bankruptcies can remain for up to ten years.
Q: Are credit scores the only factor banks consider?
A: No, banks consider various factors when evaluating creditworthiness, including income, employment history, and debt-to-income ratio, in addition to credit scores.
In conclusion, banks rely on credit bureaus, such as Equifax, Experian, and TransUnion, to obtain credit scores. The most common scoring model used is the FICO score, but some banks also consider VantageScore or their own internal scoring models. Soft inquiries are performed by banks to assess creditworthiness without impacting your score. By understanding how banks obtain your credit score, you can take steps to improve it and increase your chances of securing favorable financial products.