The Difference Between a Credit Report and Credit Score
Credit reports and credit scores are often misunderstood. Understanding these products can be confusing especially when consumers hear about how important credit scores are combined with the intense marketing of credit scores and credit report services.
Credit score and credit reports are closely related yet completely different products. A credit report is a list of all of credit information, public record information, and identification information that the credit reporting agencies have on file under an individual’s name. A credit score is a numerical summary of the information that is present in a credit report.
Credit reporting agencies collect and maintain records of an individuals credit records that are supplied by credit card companies, banks, mortgage companies, and other lending institutions. The information on credit accounts that are supplied to the credit reporting agencies by the creditors including the amount of money borrowed, payment records and additional data is used to create a credit report. There are three primary credit reporting agencies in the U.S. Equifax, Experian, and TransUnion.
The information in a credit report provided by the creditors is then used to calculate a credit score. The credit score is a three digit number that is used to determine the credit risk of a borrower for creditors and businesses assessing the financial risks of potential customers.
All individuals are entitled to at least one free copy of their credit report from the three big credit reporting agencies in the U.S. annually. Credit scores do not come with the free credit reports that are required to be provided to consumers by law, credit scores are not free.
The credit score that is calculated based on the information in a credit report may be different depending on the credit reporting agency used to determine the score as well as the type of credit score.
The most widely known type of credit score is the FICO Score. FICO Scores are the most common score used by financial institutions but there are many non-FICO credit scores available as well.
Individual credit reports from the three big credit reporting agencies are usually very similar, but they are not identical. Since the information in each credit report is somewhat different, the three credit scores from the credit reporting agencies will also be different.
Data in a credit report changes periodically, depending on how many credit accounts a an individual may have, the credit data in a credit report may change several times in a month. Since the credit score is based on the data in a credit report, a credit score will fluctuate over time and can change as often as the data in the report changes. The more accounts an individual has the more likely their score is to fluctuate as the data in their report changes when the creditors send updated data regarding an account to the credit report agencies.
Credit Scores and Credit Limit Changes
Credit scores are influenced and change up and down to a number of attributes found in an individual’s credit report. The FICO credit score is the most common credit score used by lenders. In calculating credit scores, the FICO score is derived by analyzing the data in an individual’s credit report and will change as the credit report data changes.
A number of factors are weighed in a credit report to come up with the credit score. Factors include length of credit, payment history, amounts owed, amount of new credit, types of credit used and other factors.
One of the other factors used to determine the credit score is the amount of available credit in relation to credit outstanding. This is further analyzed by the proportion of credit lines used or the proportion of credit line balances such as credit card balances in relation to the total credit limits on certain types of revolving accounts. The FICO score considers the consumer’s credit limit to evaluate what is referred to as the credit utilization rate or how much available credit is being used at the time the score is calculated. The greater an individual’s credit utilization rate, the greater the risk that person will eventually default on a credit account.
Therefore it is reasonable to find two individuals that have fairly similar credit histories and payment patterns and one of these individuals has incurred a significant amount of credit card debt in relation to their available credit limits, while the other individual has relatively low credit card balances in relation to the available credit and the two scores will be different. The individual with the greater amount of debt relative to available credit is penalized for that position.
The credit utilization rate factor that goes into credit score models is why the common advice on credit card for consumers is to avoid running up one credit card to its maximum limit, rather it is generally believed that to maintain or improve a credit score, the credit card balances should be spread out among different cards and therefore reduce the relative amount of debt to credit limit or credit utilization rate per credit card.
With credit cards companies reducing their credit card exposure by dropping credit card limits on customer accounts, it is possible that these consumers are now finding their credit scores dropping as well. In a recent FICO score study, the company found that that approximately 20 percent of the U.S. population experienced a reduction in total revolving credit between October 2008 and April 2009. In general big reductions in credit limits will work the same as increases in the debt by reducing the amount of available credit and subsequently result in a negative impact on a credit score.
According to data from FICO score, the scores derived assess a lot of data and the effect of a single factor like a credit limit reduction on an individual credit score will depend on what other data is on the credit report and how much the credit card limit or line is reduced.
The key factors that impact the credit score in conjunction with a credit limit reduction, according to the folks at FICO score, include: the amount by which their credit limit is reduced, what actions are taken by the consumers in reaction to the reduced credit limit, such as, late monthly payments, changes in the account balances, or opening a new accounts, as well as any other changes in the individuals credit report after the credit limit is reduced.
The negative impact of the reduced credit limit is therefore substantially mitigated by either positive steps of the consumer such as reducing credit balances or financial missteps such as late payments. A credit limit reduction on a single credit card account won’t necessarily damage someone’s credit history or credit score. The final impact will vary depending on each person’s unique credit profile.
Changes to Credit Score Calculations
In 2007 Fair Isaac Corporation, creators of the FICO credit scoring system announced that they would change how their credit score models evaluate credit report data. The new credit score, referred to as FICO 08, was delayed in its implementation until the second half of 2009.
The FICO score model is kept under wraps by the company that created it, but it is always a good idea to obtain a general understanding as to what makes a good or bad credit score. With the knowledge of what drives a credit score, consumers can either engage in good habits to maintain a good credit score or work to improve an existing low credit score.
The changes to the current FICO scores are taking place in a few key consumer sections that include opening new accounts or having prior derogatory information on select accounts and authorized user accounts.
The new version is less damaging for consumers that have had limited credit problems even in severe situations. The score gives less weight to isolated problems as long as the majority of other active credit accounts are in good standing.
The new formula gives less weight to minor derogatory or negative accounts such as small collection accounts and public records in which the original debt was less than $100.
The new credit model also reduces the weight of authorized-user accounts by reducing the potential score impact associated with the abuse of authorized user accounts.
Adding a spouse or child to a credit card as an authorized user has long been a good way to improve that person’s credit score, since the good history already established on the account had generally been imported to the credit report of new authorized user. Some mortgage brokers and credit repair companies began abusing this feature by “renting” authorized-user accounts from individuals that had good credit accounts and selling them to individuals who wanted to boost their scores.
According to company, they have developed technology that reduces any impact on the new credit score from intentional tampering, while allowing the scores of spouses and other genuine authorized users to benefit from their shared credit accounts.
The new credit score model uses the same 300-850scoring range, score reason codes, minimum scoring criteria, and inquiry treatment as previous versions of the score.
Credit bureau scores are often called FICO scores because most credit bureau scores used in the U.S. are produced from software developed by Fair Isaac and Company but not all credit scores are FICO scores. FICO scores are provided to lenders by the major credit reporting agencies. The FICO score is the credit risk score used by most lenders in the U.S.
Different Credit Scores
When an individual obtains a credit reports from one of the credit reporting agencies or from all three, they will see that there is quite a bit of information to digest. With more than one credit report, most of the information will be the same but there will also be some information that is different. The differences in some data from one credit reporting agency to another helps to explain why credit scores would be different from different credit reporting agencies.
Unfortunately, while the different pieces of information in different credit reports may explain why credit scores may be different from one credit reporting agency to another it doesn’t explain all the differences. In addition, when a consumer orders either an annual free credit report or simply orders a credit report from one of the big three credit reporting agencies, a credit score is not automatically given.
The Fair Credit Reporting Act requires the credit reporting agencies to supply consumers with free copies of their credit reports upon request once every 12 months but the credit reporting agencies are not required to supply the credit score. Because the credit score is not actually part of the credit report, this is a piece of information that credit reporting agencies can still charge extra for.
Now, once a consumer receives a credit score, it is important to determine if it is a score that the majority of creditors and lenders will actually use or if it is a proprietary score that is not often used by other businesses or banks.
There is one credit score that is currently used by the majority of creditors and mortgage lenders that is also available to consumers and that is the FICO score. In cases where the credit score given does not indicate that it is a FICO score the chances are its some other type of score that the lenders and creditors may not e using and is calculated using a different method than a FICO score.
Most of the mortgage companies, banks and credit card issuers rely on the FICO score created by the Fair Isaac Corp. as do insurers, retailers, telecommunications providers, healthcare organizations, and many government agencies.
The three credit reporting agencies also calculate their own credit scores, plus many lenders have their own algorithms for calculating credit scores that can be used. However, the FICO score is still the leading score used and paying for other scores may be valuable to see how an individual score currently stands but is not the best score to help determine if someone may qualify for a mortgage loan or other form of credit extension.
Credit scores are not given out free with the credit report. You have to pay a fee to get the scores. You can obtain your credit score by contacting any of the three credit reporting companies, similar to ordering your credit report. However, you may have to pay for this score.
Your score may be calculated using a number of different scoring systems from different credit reporting agencies. You will find websites that offer a free credit report and free credit score, but the score may only be free the first time or requires a monthly membership fee along with the possibility that it is a proprietary score not used in the lending business. Before enrolling in any service be sure to determine what the costs are and what the service or website will actually deliver.
TrueCredit.com Credit Report Monitoring Service Product Review
TrueCredit.com is a credit monitoring service provided by TrueCredit which is owned by one of the big three credit reporting agencies, TransUnion.
Credit report monitoring services monitor your credit report for any changes and notify you whenever certain change occur. Monitoring your credit allows a consumer to look for errors that may appear on their report, as well as unauthorized changes that may indicate fraud. TrueCredit.com and some of the other credit monitoring services also provide registered users with free credit scores and free credit reports.
TrueCredit.com by TransUnion credit report and monitoring product offers consumer credit reports and scores from the three major credit bureaus, notification of critical changes within 24 hours, and up to $25,000 ID theft insurance at no additional cost.
Credit report monitoring services are fee based service. TrueCredit.com cost $14.95 per month. Despite the cost of this service and other credit repot monitoring services, consumers are signing up to credit monitoring services through a number of different companies and programs.
TrueCredit offers the ability to view your credit report from all three credit reporting agencies online that is designed to be easy to read for consumers. The interface is established to make the credit report easy to understand and therefore making it easier for registered users to manage their credit.
The credit report will contain the individual’s personal information, account history and an account summary, inquiry information, public record information, and creditor information. The three big consumer reporting companies get their information from different sources, the information in one report from one credit reporting company may not contain all, or the same, information in the credit reports from the other credit reporting companies. By checking all three credit reports, a consumer can make sure they are maintaining a strong credit history.
The service also produces a credit score for the individual member. The credit score is a number used by many lenders, insurance companies and other industries as an indicator of how likely a borrower is to repay a contract or loan. The credit score is generated by a mathematical formula utilizing the data from the credit report. The score you’re being shown with TrueCredit isn’t a FICO score though. The FICO score, established by Fair Isaac, is the score that most lenders look at when extending credit. TrueCredit now provides a Vanatage Score as their credit score.
FICO Scores are the most common scores use in the mortgage industry, different financial institutions may use different credit scoring formulas to help them make decisions about extending credit.
When shopping for a credit monitoring service, make sure to fully understand what services they provide and what the total costs for the service will be.
As more people look for information and resources to help manage the financial aspect of their life, credit reports and monitoring services are becoming popular but they are far from necessary tools.
By Federal law, consumers are entitled to one free credit report per year from each of the three major credit bureaus. An amendment to the federal Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies to provide consumers with a free copy of your credit report, at the consumers request, once every 12 months. A free annual credit report can be obtained at annualcreditreport.com.
What are FICO Scores
FICO scores are one of several credit scores that are used by lenders, banks, insurers, credit card companies and other companies to measure consumer risk objectively. A credit score can be created by different companies based on information in a credit report, but FICO® scores are the most used credit bureau scores in the world. According to the Fair Isaac Corporation, the creator of the FICO score, more than 100 billion scores have been sold by the company and three out of four US mortgage originations are based on a FICO score.
Most credit bureau scores are often called “FICO scores” because most credit bureau scores used in the U.S. are produced from software developed by Fair Isaac Corporation. In fact, Fair Isaac Corporation or FICO pioneered the wide spread use of credit scoring models. The FICO score is available through all of the major consumer reporting agencies in the United States and Canada: Equifax, Experian and TransUnion. But not all credit scores retrieved or sold to consumers are FICO scores.
Credit scores, including FICO scores are derived from the data in an individual’s credit report. Different credit scoring models can be used by different companies. And there are different credit scores and credit score modeling programs available. There is some significance to the fact that the FICO score is the biggest and as of now has the greatest impact in credit related decision making. The FICO score is a mathematical algorithm that is made available to the three main credit reporting agencies in a software package.
Different credit bureau scores will evaluate a credit report differently and comparing the absolute numbers between different credit bureau scores is meaningless. A higher number from one company does not necessarily mean it indicates the borrower is less of a credit risk. FICO scores currently range in value from 300-850.
The credit score, whether it is a FICO score or another model, is used primarily determine a numerical valuation on the quality of credit risk an individual presents. Credit scores are designed to be a guide to future risk based solely on credit report data. All current credit score models, including FICO scores, evaluate the data in the credit report and quantify it with a number in which the higher the number or credit score, the lower the risk.
One bit of confusion that can arise within the lending industry over FICO scores is the different named scores that are actually developed by Fair Isaac Corporation. FICO scores technically have different names at each of the credit reporting agencies. All of these scores, however, are developed using the same methods by the Fair Isaac Corporation.
Like an individual’s credit, a FICO score will change over time. As your data changes within the credit report or through the credit reporting agency, so will the credit score since it is based on the data in the credit report.
It is also important to note that since each credit reporting agency will have similar but not identical information about an individual’s credit profile, therefore the FICO score or any credit score will be slightly different from each of the major credit bureaus, Experian, TransUnion, and Equifax. This all means that an individual will have three potentially different FICO scores, one for each of the three major credit bureaus.
Remember, regardless of credit score obtained, the score is based on the information contained in the credit report. To change a score, you have to change the underlying data the score is based on. Any information not found in your credit report is not used to calculate a credit score or FICO score.