The three national credit bureaus don’t share information with each other. Your credit reports from TransUnion, Equifax, and Experian can contain significantly different information about you. It’s important to monitor all three reports because you can never be sure which one will be used when you apply for a new account.
Businesses such as auto lenders, banks, credit card companies, and insurance agencies use your credit data from the credit bureaus to determine if you are a risky customer. The lower the risk, the lower the rates you will have to pay. They also use this information to send you pre-approved offers in the mail.
Not all creditors will report your account information to the credit bureaus. While businesses are legally required to report accurate information, there is no law that says they have to report at all. While nearly every major creditor reports to all three bureaus, smaller lenders and banks may not send your monthly account information to all three or any of the credit bureaus.
Along with your credit card and loan account records, your name, address, employer, and recent applications are recorded in your credit files. Public records such as bankruptcies, tax liens, and judgments can also appear on your reports. Information about your income, race, checking accounts, gender, age, religion, or health is not included on credit reports. Most information expires from your credit reports after 7-10 years. If there is something inaccurate on your credit reports you can file a dispute to have it removed from your record.
Along with your credit card and loan account records, your name, address, employer, and recent applications are recorded in your credit files. Public records such as bankruptcies, tax liens, and judgments can also appear on your reports. Information about your income, race, checking accounts, gender, age, religion, or health is not included on credit reports. Most information expires from your credit reports after 7-10 years. If there is something inaccurate on your credit reports you can file a dispute to have it removed from your record.
It’s important to keep the information on your credit reports positive and accurate. The data in your credit files is used to calculate your credit score. This three digit score is a numerical representation that indicates how risky a borrower you are from a lender’s perspective. A higher credit score (700+) will get you the best deals on big purchases.
Your credit reports and scores impact the deals and interest you will receive when you buy a home, finance a car, rent an apartment, apply for a job, buy insurance, purchase a cell phone, or open a new credit card. The best way to have healthy credit is to have a few credit cards and loans that you use responsibly and pay on time every month. Using credit irresponsibly by making late payments and maxing out credit limits can very harmfully affect our credit.
How credit scores work, how a score is calculated?
Ever wonder
why you can go online and be approved for credit within 60 seconds? Or get pre-qualified
for a car without anyone even asking you how much money you make? Or why you get
one interest rate on loans, while your neighbor gets another?
The answer is credit scoring.
Your
credit score is a number generated by a mathematical algorithm -- a formula --
based on information in your credit report, compared to information on tens of
millions of other people. The resulting number is a highly accurate prediction
of how likely you are to pay your bills.
If it sounds arcane
and unimportant, you couldn't be more wrong. Credit scores are used extensively,
and if you've gotten a mortgage, a car loan, a credit card or auto insurance,
the rate you received was directly related to your credit score. The higher the
number, the better you look to lenders. People with the highest scores get the
lowest interest rates.
Scoring categories
Lenders can use one of many different credit-scoring models to determine if you are creditworthy. Different models can produce different scores. However, lenders use some scoring models more than others. The FICO score is one such popular scoring method.
Lenders can use one of many different credit-scoring models to determine if you are creditworthy. Different models can produce different scores. However, lenders use some scoring models more than others. The FICO score is one such popular scoring method.
Its scale runs from 300 to 850. The vast majority
of people will have scores between 600 and 800. A score of 720 or
higher will get you the most favorable interest rates on a mortgage,
according to data from Fair Isaac Corp., a California-based company
that developed the first credit score as well as the FICO score.
Fair
Isaac reports that the American public's credit scores break out along these lines:
|
Credit
score
|
Percentage
|
| 499 and below | 2 percent |
| 500-549 | 5 percent |
| 550-599 | 8 percent |
| 600-649 | 12 percent |
| 650-699 | 15 percent |
| 700-749 | 18 percent |
| 750-799 | 27 percent |
| 800 and above | 13 percent |
Currently, each of the three major credit bureaus
uses their own version of the FICO scoring method - Equifax has
the BEACON score, Experian has the Experian/Fair Isaac Risk Model
and TransUnion has the EMPIRICA score. The three versions can come
up with varying scores because they use different algorithms. (Variance
can also occur because of differences in data contained in different
credit reports.)
That could change, depending on whether a new credit-scoring
model catches on. It's called the VantageScore.
Equifax, Experian and TransUnion collaborated on its development
and will all use the same algorithm to compute the score. Consumers
can order their VantageScores online at Experian's Web
site for $6. Its scoring range runs from 501 to 990 with a corresponding
letter grade from A to F. So, a score of 501 to 600 would receive
an F, while a score of 901 to 990 would receive an A. Just like
in school, A is the best grade you can get.
What's the big deal?
No matter which scoring model lenders use, it pays to have a great credit score. Your credit score affects whether you get credit or not, and how high your interest rate will be. A better score can lower your interest rate.
No matter which scoring model lenders use, it pays to have a great credit score. Your credit score affects whether you get credit or not, and how high your interest rate will be. A better score can lower your interest rate.
The difference in the interest rates
offered to a person with a score of 520 and a person with a 720 score is 4.36
percentage points, according to Fair
Isaac's Web site. On a $100,000, 30-year mortgage, that difference would cost
more than $110,325 extra in interest charges, according to Bankrate.com's mortgage
calculator. The difference in the monthly payment alone would be about $307.
Powerful
little number
If you rented an apartment, got braces, bought cell phone service, applied for a job that involved handling a lot of money, or needed to get utilities connected, there's a good chance your score was pulled.
If you rented an apartment, got braces, bought cell phone service, applied for a job that involved handling a lot of money, or needed to get utilities connected, there's a good chance your score was pulled.
If
you have an existing credit card, the issuer is likely to look at your credit
score to decide whether to increase your credit line -- or charge you a higher
interest rate, according to a credit scoring study by the Consumer Federation
of America and the National Credit Reporting Association.
