Credit Bureaus

Introduction: Credit Bureaus and Your Credit Score

You’ve heard much talk about credit scores and credit reports, and the affect they can have on your financial life. But where do these things come from, and what do they look at?

The Major Credit Bureaurs and the Computation of Your Credit Score

Although there are smaller credit bureaus, the three major league players—the ones who have the biggest impact on your financial future—are Equifax, TransUnion, and Experian. They us a method developed by Fair Isaac & Co. called the FICO scoring system. Although the exact formula is protected by copyright, Fair Isaac & Co. says their scores are based on these factors and their weighted percentages:

History of payments, delinquencies, etc.      35%
Credit limit and how much is used                30%
How long you’ve had credit                              15%
New inquiries on your credit history             10%
What kinds of credit you have had                  10%

Each bureau uses these percentages in different ways, and customizes their own scoring system based on this FICO model. For more information on Fair Isaac & Co., Inc., go to their website at www.myfico.com.

Making Credit Reporting More Fair

These three credit bureaus had been peppered by demands to make credit reporting more fair and accessible. In response, they have banded together to create a method and scale that is familiar to most—the academic grading system. This system rates your level of credit risk in increments of 99 points, and goes from 501 to 990. Each increment of 99 points gets a corresponding letter grade of A through F.

The Impact of the New Credit Score System

While this method is much easier for the consumer to understand, it also allows the lender more leeway in deciding who gets loans. For instance, although one lender may consider an A rating 930 and above, another might go with the 901 as the cutoff mark. This enables some lenders to offer good loans to people who would not ordinarily qualify for them. It gives the lender more flexibility and autonomy, and the borrower a better chance. Go to www.vantagescore.com and find out about this new method.

Your Credit Score and Insurance

The credit bureaus also offer a special kind of report to insurance companies (in states where it’s still legal). While consumer groups are against the practice, some insurance companies claim the score is a good predictor of who will file a claim. However, there are scant sources on the statistics behind this statement, only a claim by insurance companies that low credit scores mean more claims and possibly riskier behavior.

Checking Your Credit Report and Credit Score

When doing a credit check periodically—everyone should check their reports once a year—make sure to get reports from all three credit bureaus. While they derive their results in much the same way, they may not report exactly the same items, so it pays to work with all three of them.