Since writing about the way I accidentally destroyed my credit, I've had a lot of questions about credit scores and how they work. Let's take a look at the truth about credit scores and how they work.

First off — it's a CREDIT score

The first thing we need to get out of the way is the fact that it's a credit score. Your credit score is a measure of how you use credit. It's not a measure of your overall financial situation or habits. While some credit reporting agencies claim to include rental payments and you can potentially get a “boost” from gym membership payments, the reality is that, for the most part, you need to use credit to get a credit score.

So you usually need a loan of some type to get a credit score. Whether that's a student loan, credit card, car loan, mortgage, or something else, you need a loan. If you're going to build a credit score, you have to use, well, credit. There's a reason the general factors that go into your credit score break down like this:

1. Payment history: 35%.
2. Utilization: 30%.
3. Credit age/length of history: 15%.
4. Credit mix: 10%.
5. Inquiries: 10%.

Your credit score is basically how you make on-time payments and how much of your available credit you're using. Everything else contributes, but isn't as impactful as those two items.

The easiest way to build credit is with a credit card. You get a credit card. Use it. Pay it off each month. Your credit utilization is low, and your payment history is good.

Your credit score depends on reports from creditors

Next, another truth about credit scores is that everything depends on reports from creditors. Lenders report regularly to the three major credit reporting agencies, TransUnion (TRU), Experian (EXPGY), and Equifax (EFX).

For example, I pay off my credit card every month. However, the timing of my payments was set up so that when the creditors reported to the bureaus, my credit utilization still looked high. When I adjusted my payment schedule last month, my VantageScore credit score at TransUnion jumped almost 30 points. (More on different credit score models later.)

So, depending on when creditors make their report, you could have different results, even if you pay off your credit cards each month. Additionally, not all creditors report to the bureaus regularly. So there's that. I've looked at different credit reports from different bureaus and found that different items are reported.

And, of course, mistakes can be made. Way back in 2007 when my then-husband and I were buying a home, we discovered that one of the bureaus listed a student loan twice, as well as a credit card account twice. That made it look like we had more debt — and a higher debt-to-income ratio — than we did. We couldn't get our mortgage until that error was fixed.

Now for the fun truth about credit scores — they're all different!

When we talk about credit scoring, a lot of us say “my credit score.” We should actually say “my credit scores.” Because, that's what we have. Multiple scores.

Consumer vs. “official” credit scores

This gets twisty. But let's start with the free scores you get from the likes of CreditKarma, CreditSesame, and even Experian. The scores you see from these sites when you log in are consumer scores. Sadly, they are much higher than the “official” credit score that comes after some proprietary version of your FICO score has been applied. Here, let me show you something:

The top two, TransUnion and Equifax, are based on VantageScore models, while the Experian is based on its consumer version of a FICO scoring model.

While the top two updated when I logged in while writing this, the Experian just used data from last month. I'm actually excited to see what things look like with the new credit card payment schedule. But, I digress.

As you can see, these consumer scores seem to show progress from when I tanked everything a couple of years ago. However, when I got a wild hare and decided to see if I could get a mortgage, the “official” credit pull with a mortgage scoring model showed scores ranging from 601 to 614. At that point one of my consumer scores was 670. That's right: the difference between my lowest “official” score and my highest consumer score was 69 points.

How is anyone supposed to get a realistic view of what they can do when this is the case? I thought I had a shot at a mortgage because, even though I knew consumer scores are generally higher than “official” numbers, I didn't realize it would be quite that level of disparity.

FICO vs. VantageScore

FICO is considered the “gold standard” and most lenders use some version of FICO scoring models to make decisions. VantageScore was developed by the three major bureaus, and uses some different weighting and has a couple of extra considerations. When you look at a consumer credit score from score tracking websites, there's a good chance that what you're looking at is the VantageScore, which fewer lenders use.

And it doesn't matter anyway, because your consumer score is near useless in determining what you can accomplish with a lender.

Proprietary scores, different FICO models, and more!

So, just get your FICO score and it's fine, right? Just go to myFICO and pay to see the thing. Once again. Even with FICO, the score you have access to is your consumer score. Even when you go straight to the source.

Here's the thing, FICO offers scoring models that others can use. But they can be tweaked. They can be tweaked based on the type of loan you're getting (mortgage vs. car loan), and they can even be tweaked using other proprietary methods.

Additionally, your FICO score from the three different bureaus is different depending on various factors. That's why at one point in the process, my FICO score from one bureau read as 590 while the FICO score from another bureau read as a 612. That's a 22-point spread.

But, there's more. FICO periodically updates its model, tweaking and changing which items get more weight. As you might expect, the items that receive weight go beyond just the five main factors. While most individual items fit into those five categories, there are all sorts of proprietary nuances that go with it.

You might have noticed that the Experian image above says it uses FICO 8. But there's a new kid and town and their name is FICO 9, and even that model is still being tweaked in 2020. Most lenders still use FICO 8, but in the coming years, the models might shift. And, of course, new models will come out again later.

Credit scoring models are always evolving based on consumer habits as mined by big data.

So, are credit scores an accurate representation of risk?

Here's where we get into the nitty-gritty. Are credit scores an accurate representation of the risk you pose? In general, the consensus is that credit scores provide a reasonably accurate view of whether someone is likely to make loan payments on time.

However, they're not perfect. There's a reason medical debt collections are being de-emphasized to some degree in FICO 9. Turns out, according to the data, medical debt sent to collections is less of a risk factor than other debt sent to collections.

(This also illustrates some of the proprietary nuances in credit scoring models. It's well and good to say that 35% of your score is related to payment history, but it's clear that somewhere in the algorithm different types of debt payment history are weighted differently — and we don't have a clear picture of that.)

Mistakes happen — and they will cost you

Additionally, credit scoring hits you hard if you've been reliable up to a point but then have a change in circumstance. My case is a good example. My score, in the 700s (thanks to when I was making my payments, with the appearance of high credit utilization), tanked to the high-500s to low 600s, depending on the source.

Missing just one payment causes a problem worth a significant drop. However, after I was apparently missing several payments (thanks, unexpected debt settlement), the effects leveled off. 

The fact that I don't miss rent payments (not credit), pay all my utility and other bills on time (not credit), and have a good income (not credit) doesn't matter. Algorithms don't care about extenuating circumstances, like accidentally enrolling in a debt settlement program, having a huge medical procedure, or going through a job loss.

How does the credit scoring industry impact your ability to do things?

Now, I'm lucky, my “needs work” to “fair” credit score doesn't really impact my life. I have credit cards still, and the rewards that come with them. And I've been able to move into a bigger rental that better fits my small family's current and future needs.

However, I wouldn't have been able to secure a mortgage. Even though you should be able to get an FHA loan with 3.5% down with a credit score as low as 580 (and 10% down with a score as low as 500), it's still the lender's call. And it's hard to find a lender willing to take that risk — without charging an outrageous mortgage rate.

In some cases, you might have a hard time renting. In some states, your credit score can even impact your car insurance premiums. And you might even have a hard time getting a car loan or meeting other requirements. For example, if my son's 529 wasn't enough to cover his costs, and if he were going to an expensive school, I wouldn't qualify for a Parent PLUS loan with my issues. So I couldn't cover a college funding gap.

Some people rely on credit to improve their finances

My level of privilege means that I have some leeway to make mistakes. But not everyone does. In fact, in some cases, for those who don't have access to the financial resources and support system I have, credit is required. Whether it's getting a business loan, using a loan for education, needing to get a car to drive to a better drive, or any other myriad reasons, a poor credit score can keep some people in poverty.

It seems counter-intuitive, but the reality is that good credit can help people move out of poverty. It's not just about debt, either. The truth about credit scores is that they can impact the fees you pay, whether you have access to beneficial services, and more. When you're poor and have poor credit, everything is amplified. The punitive nature of the credit scoring industry disproportionately impacts marginalized communities and makes it harder to financially advance.

Bottom line — the truth about credit scores

To some degree, the credit scoring industry has an outsized influence. So many companies, even those that don't issue credit, use your credit report or even your score to some degree. While it's possible to find some financial service providers that use alternative methods of determining your “worthiness,” it can be expensive to use these services. Many of them require you to pay for each “tradeline” you want examined. And you could still pay a higher interest rate on resulting loans.

So, before you congratulate yourself too much when you look at Credit Karma, Credit Sesame, Smart Credit, or any other consumer scoring site and see a great score, remember that it could be lower in reality. And if the consumer site shows you a “Fair” score, there's a good chance there's an even bigger discrepancy. Use consumer sites to track your progress and get good ideas, but don't assume that you're looking at your “real” credit score.