Prior to the creation of credit scores, financial institutions and lenders would often develop their own creditworthiness score to assess the risk of lending to that particular person. This “score” would vary significantly from one lender to the next. The major issue with this innovative method was that it was based solely on the lender’s ability to judge a person’s risk level, rather than a common set of rules, guidelines, and specific calculations or algorithms.
Fair Isaac Corporation (FICO) comes along in 1989 and sets up the first general purpose credit scoring system based on credit bureau information in order to help remove the inherent inconsistencies that arose from having each lender perform their own credit risk analysis. With the new FICO scoring system in place, it would provide a universal and impartial tool for evaluating consumer credit risk. In 1993, FICO introduced specialized credit scores for auto dealerships, credit card companies, mortgage companies, and small business lending agencies.
Equifax, Experian, and TransUnion:
You are entitled to one free credit report a year from each of the three major credit reporting agencies – Equifax, Experian, and TransUnion. However, if you would have your credit rating or credit score pulled once from each of these three agencies, you would likely find that your credit score differs somewhat among the three agencies. Why is this?
A person’s credit score, or credit ranking, is based upon personal financial information, such as revolving accounts, bills and debts owed, lawsuits and bankruptcies, and other negative and positive incidents. The credit score is calculated by using an algorithm that assigns different weights or points to different aspects of a person’s financial history.
There are three primary reasons why your credit score will vary among Equifax, Experian, and TransUnion. The first and most compelling reason for score variance is that the financial information available to each credit agency differs from day to day. Suppose your TransUnion score was pulled first. One month later, your Experian score was pulled, and the resulting credit score was lower than your TransUnion score. However, you paid the electricity bill late just before your TransUnion score was pulled. Your late payment lowered your credit score, but it did not become a factor until your Experian score was pulled. This accounts for the difference between your scores.
The second and more hotly disputed reason for score variance is the difference in credit ranking calculations between each credit reporting agency. TransUnion, for example, claims that Equifax and Experian all use different algorithms to calculate their credit scores. However, other sources claim that there is no difference in the way FICO algorithms are designed or applied. Bad-credit-advisor.com states that confusion arises because each credit reporting agency calls the algorithm by a different name – but it is the same algorithm. This is always kept a big secret. FICO never releases exactly what makes up their algorithm, and the agencies never reveal how they weigh certain aspects of your credit report to come up with your credit score.
The third and most likely reason for credit score discrepancies has to do with what’s being reported on each agency’s credit report. You might have an error on your Equifax report that is not found on your Experian or TransUnion reports. This is actually a very common mistake and why it’s so important that you check out all of your credit reports on an annual basis, if not on a quarterly basis. This could be the reason why your credit score might differ from each agency.
Just like an individual’s thumbprint, no credit score model is exactly the same. Each credit score model has a slightly different method for weighing credit score factors. The credit bureau can use many different credit score models based on the requirements of different lenders. For example, a mortgage lender may use a different scoring model than an auto lender because they each place importance on different factors. Though your credit scores may vary, they’re all based on information in your credit reports. So focusing on what’s in each of your credit reports could help you build up your credit overall and raise your score.
Other credit scores:
While FICO is the most well-known credit scoring system, there are several other versions and providers of credit scores, such as VantageScore, NextGen, BEACON, and EMPIRICA to name just a few. Some scores are directly developed by the three credit bureaus while others are developed by outside companies. Your FICO score will most likely be different than your VantageScore or BEACON score.
Why Should I Get A Yearly Credit Report:
If you have ever applied for a loan or a credit card, you are probably aware of the importance of your credit report and credit score. The information a credit report contains tells lenders whether you are a good credit risk or not. It can also determine what interest rates you will be offered and other important things like whether or not a Landlord should rent their apartment to you.
Have you ever thought about obtaining a yearly credit report online? If you are not currently involved in obtaining a loan or a credit card, you probably have not thought about your credit report lately. However, just as a yearly medical exam is crucial to your physical health, a yearly credit report is vital to maintaining good financial health.
Reason #1 –
A yearly credit report lets you see what is going on with your finances. It also alerts you to problems of which you may not be aware. Under federal law, you’re entitled to a copy of your credit report once annually from all three major credit reporting agencies. Everyone should check their credit reports from each of the three credit bureaus at least once annually, if not more. Doing so will make sure your credit is up-to-date and accurate. Each reporting agency collects and records information in different ways, and may not have the same information about your credit history.
Reason #2 –
If for no other reason than to keep it up-to-date, you should obtain a yearly credit report. It is not uncommon for errors and negative comments to show up in your records without your knowledge. Keeping your credit report clean is very important as this will affect your credit score. Most often, it is a long process to get something removed from your report. It is a good idea to get a yearly credit report so you know what is in the report. This can also help you to keep it free of errors that could hurt you. After all, you never know when you might find yourself needing something major like a refrigerator or a new vehicle. You do not want your potential creditor to be the one to find the red flag in your report that should not be there.
Reason #3 –
Unless you have been living under a rock for the last few months, you know how big the problem of identity theft has become. The news is full of stories about retail stores, banks, hospitals, universities, and other institutions privy to a wealth of our personal information that has failed to protect us. A yearly credit report lets you see if credit is being applied for in your name without your knowledge. This is the best way to tell if you’ve become a victim of identity theft. Getting a yearly credit report for your children is a good idea as well because child identity theft is a growing problem.
Reason #4 –
It’s not difficult to obtain a yearly credit report. In fact, they can be requested online for FREE by visiting www.annualcreditreport.com or by calling 1-877-322-8228. You will need to provide your name, address, social security number, and date of birth. You will need to provide some information on your credit report, such as the amount of your mortgage payment to verify your identity. So there is no reason to put off getting your yearly credit report. Remember, it is a check-up for your financial health!
Reason #5 –
You should review your credit report just like you do your bank statements and credit card bills. Managing credit, keeping track of spending and putting aside savings are all essential to being financially successful. It’s also important to make sure there isn’t any duplicate information listed on your credit report. A duplicate credit report entry occurs when a credit account is reported more than once. This can be a problem because it may show you have double the debt and increase your credit utilization ratio, thereby affecting your credit score as well.
Reason #6 –
Mixed credit reports happen more often than you’d think. If you have a similar name to another person, there’s a chance that your credit reports could get mixed up. Your credit reports could either be merged into one report or the two reports could contain information from both of you. This occurs frequently with parents and children who share the same name and address, so it is important to double check all entries on your report if you are a junior or senior.
There really is not a good reason WHY you shouldn’t check your credit report at least annually and see what’s going on. Consumers don’t realize how important their credit report and credit score have truly become. It obviously has a large impact on your financial life, whether you’re applying for a loan or trying to get approved for a credit card or looking to rent an apartment. It’s easy to understand why you should get your credit report yearly and take a close look at it.
We offer a Credit Report Review Service if you need help obtaining your credit report and understanding what’s on it. We’ll also give you some suggestions so that you can try to improve your credit score on your own and fix any errors on your credit report. Click Here to find out more about this wonderful service!
It’s also very important to discuss credit score discrepancies with a trusted financial expert, such as an Advantage CCS certified credit counselor. Small differences can become big discrepancies if your score teeters on the border and you’re literally points away from being denied credit. Your credit counselor can help you figure out why your credit ratings show such variation and they might be able to help you find mistakes on your credit report that might affect your score and bring it up. It’s worth the free call!