Ask the experts: The top 5 questions about credit score.

Why are credit scores so confusing?

Credit scores may seem confusing but once you understand what it is and what parties are involved the role they play, it all becomes clear.  Your credit score shows your history of using credit, including accounts you have opened and closed, credit limits, payment history amounts owed, and defaults.  A credit score is tallied based on these factors and more, so your credit history determines your credit score.

Your credit score is determined by an algorithm developed by the Fair Issue Corporation (hence its other name of FICO score). Three corporations, called “credit bureaus”, specialize in collecting and reporting on financial histories. Those three companies are Equifax, Experian and TransUnion.  While their calculations are secret, we do know that the basic building blocks of your credit score are founded on: Inquiries, Mix of Credit, Age of Credit, Debt Ratio, and Delinquencies. 

How do you get your FICO scores?

www.myfico.com is the only way for consumers to actually get their FICO scores.  All other sites will be "educational credit scores".  Currently costing about $20 per score.

Most of us have been charged to pull our credit report at some time, or go onto one of those “free” sites, only to be hit with a $15 hidden fee to see the full report.  But according to the Fair and Accurate Credit Transactions Act (the FACT Act), you are eligible to receive a free copy of your credit report once each year from each of the three major credit bureaus by going to www.annualcreditreport.com.  This will show your credit history, not your score, but at least you’ll be able to monitor your credit activity and make sure you’re on track.  You can also receive a copy of your credit report through a company like Blue Water Credit or a mortgage lender when applying for a loan.

What does your credit score predict?

A credit score is the statistical prediction of one's likelihood to pay late over the next two years. The higher the score, the less likely one is to have a late payment. The bank then uses this number to assess the amount of risk involved with lending someone money. Banks are a lot like casinos in a sense, they like to place bets where they feel they will win.  Credit scores are trying to predict the same basic thing: the likelihood of a consumer being 90 days late on any payment within the next 24 months.  Credit score isn’t only used for mortgage loans anymore, now insurance companies utility companies, and even employers look at credit as an indicator of timely payments and responsible behaviors.

Why are all three credit scores different?

Determining a credit score is a tricky business since there are many credit scoring models in use, each fitting a consumer into their particular model. Some of the credit scores in these models go up to 990. While there are multiple formulas for calculating credit scores, the formulas introduced by the Fair Isaac Corporation (FICO) are the most widely used. This score ranges from 300-850.

How many credit bureaus are there?

There is actually 5 bureaus now: Equifax, TransUnion, Experian  are the big 3 we all know of.  Innovis and CoreLogic are attempting to compete but are not recognized by FICO.  Equifax, TransUnion and Experian are the three independent bureaus that each report a consumer’s credit separately and which FICO looks at to create a score.  People often see all three bureaus reported on one report, so they don’t realize it’s not all the same.  Since the bureaus each formulate a FICO score differently, your scores can vary based on credit bureau.

 

Why are all three credit scores different?

You have three different credit scores because there are three major credit bureaus and they each have different algorithms for calculating your credit score.  There are usually similarities but each bureau reports independently so it’s important to monitor and manage each one.  Equifax may have something reported incorrectly while TransUnion has it right, so your scores will vary based on errors, duplicates, and their formulas. Credit bureaus like Experian, TransUnion, and Equifax don’t ever make decisions about if you get credit.  They do, however, collect data about your use of debt and compile a credit score to share that with banks, lenders, or retailers who are considering lending you money so they can better gauge risk.