Credit Score Basics
A credit score is a numerical indicator used by credit unions, banks and other lenders to evaluate the potential that you will repay debt, and your creditworthiness. Other organizations, such as mobile phone companies, insurance companies, employers, and government departments may also check on your credit history.
Lenders use credit scores to determine who qualifies for a loan, and possibly the interest rate, as well as the amount of the loan. The higher the credit score, the more likely that the borrower will receive a favorable decision and the lowest interest rates.
A credit score is primarily based on credit report information, retained by credit bureaus, which collect information about an individuals’ history of borrowing and repayment. Department stores and utility companies may also submit information about individuals. Those companies that submit information generally only report to the credit bureaus their experience with customers or borrowers who are late on payments or are delinquent. The three major credit bureaus are Experian, TransUnion, and Equifax.
Differences Between Bureaus
The credit bureaus all have their own credit scores: Equifax offers the Beacon score to other businesses and ScorePower to consumers; Experian calculates a PLUS Score; and TransUnion offers Empirica. Each also sells the VantageScore credit score.
Experian and TransUnion’s scoring model is considered very similar to that of the Fair Isaac method. The FICO credit score ranges between 300 and 850. The VantageScore score ranges from 501-990.
There are different methods of calculating credit scores. The most common, the FICO credit score, was developed by Fair Isaac Corporation. A FICO score considers how much debt you carry, your repayment history, and records how many requests for a FICO score have been made about you. Your credit score will be used, for example, by many mortgage lenders that use a risk-based system to determine the possibility that you may default on financial obligations to the mortgage lender.
Each credit bureau calculates your credit score with the data in its own credit file. Credit bureaus do not share information with each other. So, if you have a collection report that appears in your TransUnion credit report, but not on your Experian credit report, you likely will have a lower score from TransUnion than Experian.
Creditors generally do not check all three credit bureaus when considering your application for a loan. Usually one credit bureau will be favored by a given lender over another based upon which is considered to have more complete records in a given market area.
Getting a Free Credit Report
The Fair Credit Reporting Act (FCRA) guarantees consumers one free credit report each year from each of the three agencies. The FCRA promotes the accuracy and privacy of information in the files of the nation’s consumer reporting companies. Under federal law, you’re also entitled to a free report if a company takes adverse action against you such as denying your application for credit, insurance, or employment and you ask for your report within 60 days of receiving notice of the action. The notice will give you the name, address, and phone number of the consumer reporting company. You’re also entitled to one free report a year if you’re unemployed and plan to look for a job within 60 days; if you’re on welfare; or if your report is inaccurate because of fraud, including identity theft.
The three credit bureaus together operate Annualcreditreport.com, where users can get their free credit report, normally without credit scores. The report presents what your creditors have experienced regarding your repayment history with them. If you see any errors, your report will include instructions regarding how to remove that error. Remember, the higher your credit score, the better your access to credit and the lower the interest rate you are likely to be offered. So, it pays to check your credit report annually. Credit scores are available as an add-on feature of the report, for a fee. A consumer reporting company charges you $9.50 or more for an additional copy of your report within a 12-month period.
What's On a Credit Report
A credit report is basically divided into four sections: identifying information, credit history, public records and inquiries.
Identifying Information: This section identifies you. Review this information to ensure accuracy. Changes you may make in this section will stay on your credit report and could complicate loan applications.
Credit History: Each account will include the name of the creditor and the account number, which may be scrambled for security purposes. The entry will also include:
- When you opened the account
- The kind of credit (installment, such as a mortgage or car loan, or revolving, such as a department store credit card)
- Whether the account is in your name alone or with another person
- Total amount of the loan, high credit limit or highest balance on the card
- How much you still owe
- Fixed monthly payments or minimum monthly amount
- Status of the account (open, inactive, closed, paid, etc.)
- How well you’ve paid the account
- Public Record: This cites financial-related data, such as bankruptcies, judgments and tax liens.
- Inquires: Inquires are divided into two sections. Hard inquiries are initiated by filling out a credit application. Soft inquiries are from companies that want to send out promotional information to a pre-qualified group or from current creditors who are monitoring your account.