Credit Reports versus Credit Scores
by Michelle Black, CreditWriter.com
For many people the world of credit can be a very confusing place. If you can’t explain the difference between a credit report and a credit score, you are not alone. People often use the terms “credit reports” and “credit scores” as if they were interchangeable. However, credit reports and credit scores are two completely different products. Here is a crash course in credit terminology to help you make sense of this confusing topic and help turn you into the super savvy consumer you always wanted to be.
There is not merely one, but rather three major credit reporting agencies (CRAs) who compile data from lenders, banks, credit card companies, collection agencies, public records sources, etc. The CRAs are Equifax, Trans Union, and Experian. This data is compiled into credit files which are then used to generate credit reports (basically user friendly versions of the credit files themselves). In fact, the CRAs compile credit data about hundreds of millions of consumers and sell credit reports to lenders and even directly to consumers themselves.
If you have not checked your credit reports in a while, it is a good idea to do so right away. After all, it is ultimately your personal responsibility to monitor your credit reports for errors and for fraud. You can access a free copy of each of your credit reports for free once every 12 months at www.annualcreditreport.com. Credit reports do not exist to judge your credit management history, but rather to simply lay out the facts regarding how you manage your debts.
Contrary to popular belief, the CRAs themselves do not calculate your credit scores. Where a credit report simply lists a record of your credit management history, a credit score actually exists to evaluate and rate that data into an easy to understand number for lenders. A low number indicates that the consumer has a history of poor credit management. A high number indicates the opposite.
You actually have hundreds of different credit scores which are commercially available. However, for the purpose of this article we will focus on the original and most popular credit scoring models – those created by FICO.
In 1989 FICO partnered with Equifax to introduce the first credit bureau FICO risk score. Today, FICO builds credit scoring software and installs the software on the mainframe at each of the 3 major CRAs. A CRA will use FICO’s software to evaluate a consumer’s credit data and then sells the credit report with a FICO score attached to lenders. Credit scores are essentially an add-on product. FICO receives a royalty from the credit bureaus for the use of the software.
The purpose of a FICO credit score is to predict risk – specifically the risk of the consumer going 90 days late (or more) on any account within the next 24 months. FICO credit scores range from 300 to 850. If a consumer has a low credit score then the data in the consumer’s credit report indicates that there is a higher risk involved with loaning money to that consumer. If a consumer has a high credit score then there is a lower risk involved with loaning money to that consumer.
You Cannot Control Your Scores
As mentioned above, although FICO’s credit scoring models are currently the most popular among lenders, you actually have hundreds of different credit scores. Furthermore, you cannot control which scoring model a lender will use to evaluate your credit reports whenever you apply for a loan. Yet you exert a great deal of control over the information from which those scores are calculated – your credit reports.
Credit scores are determined based upon your personal credit report data. Therefore, taking steps to improve your credit reports will generally help your credit scores by extension. Keeping your payments on time, paying down credit card balances, and not applying for new credit too frequently are just a few methods you can employ to achieve this goal.
Additionally, remember that the Fair Credit Reporting Act (FCRA) gives you the right to expect accurate and correct information to be contained in your credit reports. If you suspect that a collection agency, creditor, or any other company may be reporting incorrect information about you to the credit bureaus you have the right to dispute that questionable information. You can dispute errors or questionable credit information on your own, or you can also hire a credit repair professional to help. CLICK HERE for a list of NACSO accredited credit repair companies in your area.