While some companies may loosely use the term "credit report," there are only three companies in the United States that compile and publish credit information on consumers: TransUnion, Equifax, and Experian. These three agencies are used by creditors to figure out the risk they are taking when lending money to consumers.
In this article, we are going to talk about one very important way these three agencies make money, and how it can affect someone's lifestyle: credit scoring. We're also going to talk about credit reports, because the information in the report is directly related to credit scores.
While each company may provide a slightly different offering, the industry is very consistent in their approach to compiling credit reports. That is to say, the report from each of these three agencies will usually contain the same information.
While all of the information contained in a credit file should be accurate, consumers need to pay special attention to the account history section of the report. Agencies have relationships with creditors such as utilities and issuers of credit cards. It is these relationships that help them gather enough information to compile an accurate credit report.
The account history information will vary by agency, but each has forged enough relationships with creditors to provide an overview of payment patterns. Does someone pay on time? Do they carry a high balance on their credit cards? Using this account history information, each agency is able to generate an individual credit score.
As mentioned earlier, credit scoring is one of the ways these agencies make money. By examining the information that appears on a report, the agency can develop a score that gives future creditors a feel for the risk associated with lending someone money or allowing them to make purchases on credit. Each agency has developed their own proprietary calculation for summarizing all of their information into a single score. The score is summarized as a numerical value, usually on an 850 or 990 point scale.
All agencies use a variation of what's called a FICO score, which is based on a model developed by Fair Isaac, and the components of that scoring model include:
|Score Component||Weight in Credit Score|
|Length of Credit History||15%|
|Types of Credit||10%|
Companies are slowly migrating to the use of VantageScore, which uses a scale that ranges from 501 to 990. Regardless of the mechanism used, the components are essentially the same as FICO. To simplify matters even more, most creditors work with agencies to develop a pass / fail / maybe screen, instead of looking at a numerical score. The following examples demonstrate how this works:
Let's say Bill is moving into a new home, and he contacts the electric company to make sure the electricity is flowing when he arrives. If Bill doesn't already have an account with the company, they will contact the credit agency they work with and figure out if they need a deposit, and how large the deposit should be. This would be based on the pass / fail / maybe screen they've already established with the credit reporting agency.
Ever seen a cellular phone kiosk at a mall? Individuals can walk up to the kiosk and order service right on the spot. How do they know if someone is going to pay their bills? They know because the application gives them permission to check with a credit agency. In less than a minute they can call the agency, understand someone's credit risk, and hand them a new phone.
The Fair Credit Reporting Act "promotes the accuracy, fairness, and privacy of information in the files of consumer reporting agencies." That same act gives consumers several rights, one of which is one free copy of their credit report every twelve months. This act does not give individuals access to a credit score, only the information used to develop it.
If someone wants to see their score, they need to purchase it from an agency. The cost of a score varies by agency, but the fee is around $10. One could argue that getting access to a score should be a secondary consideration. If the information on a report is accurate, the score is merely a result of that input.
This is the very reason so much emphasis is placed on making sure the information contained in a report is accurate. Companies offering credit repair services can only fix problems on a report. They cannot change a score directly, only the inputs used in its calculation.
Anyone interested in obtaining a free copy of their credit report should visit AnnualCreditReport.com. It's a good idea to request a free copy if someone is planning to make a large purchase, such as a home or car, and will be applying for a loan in the not-to-distant future. It's better to make sure the report is clean before applying for credit, this way there is no unnecessary delay in getting a loan. Each agency has a process for appealing and / or correcting mistakes found on reports.
Anyone discovering an error on their credit report should contact the reporting agency directly. The mailing address and a toll free telephone number for each of the three major agencies appears below, as well as links to their websites:
P.O. Box 740241
Atlanta, GA 30374-0241
P.O. Box 4500
Allen, TX 75013
(888) EXPERIAN (888-397-3742)
P.O. Box 2000
Chester, PA 19022-2000
About the Author - Credit Reporting Agencies