Most consumers know the importance of building and maintaining a good credit history. What many may be confused about, however, are the different methods used to track and rank their credit profile. Credit reports and scores are used by banks, lenders and other financial institutions to screen applicants for a wide variety of financial services. Each tool will serve different purposes, so it’s important for you clearly understand the role that each one plays.
Collecting financial statistics is the business of the credit bureaus and requires no one’s permission. Knowing where you stand will ensure you’re well-positioned for any financial moves you make in the future. Here’s how credit bureaus track your credit history and rank your financial situation:
Your Credit Report
Your credit report is a compilation of all of your financial activity and includes information about where you live, how you pay your bills, the status of all loans and credit accounts, whether you’ve been sued, arrested, or filed for bankruptcy. Credit bureaus sell the information in your credit report to creditors, insurers, employers, and other businesses that use it to evaluate your applications for credit, insurance, employment, or home rentals.
Your Credit Score
Your credit score is the rating given to every consumer who uses credit of any kind. It’s generated by using algorithms designed by the Fair Isaac Corporation (FICO), which evaluates the activity on your credit report. Scores range from 300-840, with a higher score meaning a better rating.
The three credit reporting bureaus use independent formulas to calculate your FICO score, so they will vary between agencies (Equifax, Experian and TransUnion). Differences can also be a result of discrepancies on your credit report, and this is one of the most important reasons to request a copy, review it carefully and report any errors.
In addition to FICO scores, a newer rating system was recently introduced by the three major credit bureaus called VantageScore. Touted as a simple and easy-to-understand type of scoring method, VantageScore is still not as widely accepted as FICO, but strives to help lenders predict risk with the greatest degree of accuracy. Scores range from 501-990 and tend to be slightly more favorable to consumers with short credit histories.
Who Uses What?
Whether a company uses your credit report, your credit score, or both will depend on the lender and what they’re trying to accomplish. Typically, anytime you apply for a large loan or line of credit, the lender will do a detailed evaluation of your credit report. For smaller lines of credit or situations where a complete background evaluation isn’t necessary, credit scores are often used to screen applicants, and the company may or may not review your credit report.
Request Free Credit Reports
Consumers are allowed one free copy of their credit report each year by all three credit bureaus. To do so, visit annualcreditreport.com or call 877-322-8228. In addition, if you’re denied credit for any reason, the lender is required to disclose the reason and the credit bureau that provided the information, if the report was used to deny the loan. You can request a free copy of your credit report by contacting the credit bureau directly and requesting your report.