Did you know that your credit history – credit cards, loans, some medical bills, collections, etc. – is compiled into a single document known as your credit report? Did you also know that the information in your report can be given a numerical value called a credit score? Your credit report and credit score are the two primary methods that creditors and lenders make credit decisions about you.
When you apply for a credit card, either your credit report or credit score (or both) are checked to see if you have a history of late payments on your accounts. Mortgage lenders check your credit report for previous loan defaults. Even the power company checks your credit report and score before turning on your electric service.
Your credit report includes information about where you live, where you work, how you pay your bills, whether you’ve filed bankruptcy, and if you’ve been sued. Your report is maintained by credit bureaus. There are three major credit bureaus – Equifax, Experian, and TransUnion.
Credit bureaus collect information from credit card companies, banks, virtually anyone with whom you have an agreement to pay. The information is compiled and sold to businesses who want to view the information to make a credit decision about you. The Fair Credit Reporting Act, FCRA, limits the businesses that can access your credit report to those that have “permissible purpose”.
Your creditors and lenders send information about your accounts to credit bureaus. This includes monthly payment status, account balance, credit limit, account status, and any other information that can be used to determine your creditworthiness. Once the information appears on your credit report, it’s available for future creditors and lenders to see.
Checking your credit report periodically is important for maintaining financial health. You can obtain a copy of your credit report by contacting any of the three credit bureaus. The FCRA allows you to order a free copy of your credit report from each of the three credit bureaus each year.
Your credit score is a numerical summary of your credit report. Since it’s a number, creditors and lenders can easily assess your credit risk to make a decision about extending a loan or credit card to you. Credit scores range from 300 – 850.
Consumers with higher credit scores are considered to be less risky borrowers than those with lower credit scores. Higher credit scores allow you to get lower interest rates on credit cards and loans, lowering the cost of having credit. Consumers with low credit scores usually have higher interest rates and might be denied for some credit cards, loans, and other credit-based services.
There are many different methods of credit scoring and some lenders even have their own credit score. The most widely used version of the credit score is the FICO score, named for Fair Isaac Corporation, the company credited with developing the score.
All three major credit bureaus have their own version of the FICO score. Equifax uses the Beacon system, Experian uses the Experian/Fair Isaac system, and TransUnion uses the Empirica system. Even though the systems are different, each produces comparable scores.
Credit scores aren’t included in the free annual credit report benefit enforced by the FCRA. Instead, you must purchase your credit report from the credit bureau issuing your credit report or from myFICO.com, a Fair Isaac division.