Your credit scores (because, yes, there are many) are used in a variety of ways. Lenders, landlords, cellphone providers and insurance companies are just a few entities that look at versions to determine whether to do business with you. Given how scores permeate so many areas of your life, it’s easy to get confused about what these three-digit numbers actually say about you. Here’s a breakdown of what is and, more pointedly, what isn’t captured by your credit score.
What’s in a Credit Score?
Credit scores are used, first and foremost, by companies looking to identify the likelihood that will you repay a contract (usually some sort of loan) back as agreed. Because of that, major credit scoring models, like FICO, consider your past and present credit information, including your payment history, the amount of debt you currently owe, the types of accounts you’ve held or hold, your credit age and your history of looking for credit, in their calculations.
However, it’s important to remember that the final numbers don’t always capture a total (or even completely accurate) picture of your financial health, partially because other important figures, like your salary, and the reasons for certain behaviors (like, say, a collection account for magazine subscription you didn’t know you opened) aren’t crunched by the algorithms. Here are some other things traditional credit scores do not consider.
1. Your Current (or Past) Employment Status
Many lenders will ask for your salary when you fill out a loan application, but those figures generally aren’t factored into the scores you see. Scores also don’t account for whether you are currently working — or if you weathered a spate of unemployment in the past (which, importantly, could explain why you missed a credit card payment three years ago.)
2. Your Overall Net Worth
In addition to your current salary, credit scores generally don’t concern themselves with how much money is currently in your bank account, what you’ve socked away for retirement or the value of the house you’re living in, among other things. Again, many financial institutions — and mortgage lenders, in particular — may ask for this and other supplemental information when you apply for a loan in an attempt to pin down your overall debt-to-income ratio, but there’s still a good chance someone with a high net worth and mediocre credit score could wind up getting denied or paying higher interest on the financing.
3. Your Medical History
Credit scores generally don’t list any health conditions you may be suffering from or have suffered from in the past — an important tenet for consumers with medical bills in collections (and, yes, there are quite of few of them) to note, since these accounts will negatively impact their credit.
4. Undeclared Disputes
Got a credit card debt that’s currently being divvied up as part of your forthcoming divorce settlement? Or an old utility collections account you thought a past roommate had paid? Creditors won’t see these explanations or that any debts on your report are in dispute unless you formally take the issue up with the major credit reporting agencies and/or your creditors. And, even then, it’s possible for the dispute to go un-noted. That’s not to say you should go around formally contesting all gray areas appearing on your credit report — in fact, doing so could possibly hurt your credit score in the interim by losing out on the positive payment history or credit age of the account. (You can read more about how disputes are handled here.) But it is important to recognize that context is generally excluded from your numbers.
Understanding a Credit Score’s Importance
Though context may, at times, seem vital, you shouldn’t use the lack thereof as a reason to ignore your scores — they’re still going to drive whether you can get a loan or other service contract and what interest rates or fees you’re likely to pay. As such, it’s important to keep abreast of where you stand and identify areas in which you can improve. (You can can check your credit scores for free each month on Credit.com to track your progress and get an action plan for which areas of your credit need work.)
If you don’t know where to start, checking for errors, paying down high credit card balances and getting any delinquent accounts you’re not contesting out of default could give your scores a short-term bump. You can help keep your credit score in tip-top shape in the long run by making all payments on time, keeping the amount of debt you owe below at least 30% and ideally 10% of your total available credit and only adding new credit lines as your wallet (and your scores) can afford it. (If you want some help with fixing your credit or don’t want to do it yourself, you can hire someone to help — read more here.)
More on Credit Reports & Credit Scores:
- What’s a Good Credit Score?
- How to Get Your Free Annual Credit Report
- How Do I Dispute an Error on My Credit Report?