Things You Need to Know: Why Credit Score Offers Are Not All the Same
The scores might not be the same ones used by lenders and insurers to make credit decisions
In the wake of the penalties imposed by the Consumer Financial Protection Bureau (CFPB) on credit reporting companies TransUnion and Equifax for misleading consumers about how valuable the credit scores that they marketed and sold actually are, it is important for consumers to know how and why credit score offers are not all the same.
There can be important information in credit scores and credit reports. Whenever you are thinking about an offer that you have gotten for a credit score, you should remember that the score that you are being given or sold might not be the same one that is used by lenders and insurance companies to make decisions about credit. So here is some information that will help you to make sense of all the offers.
A credit score is a three-digit number calculated using information in your credit report. Lenders and insurance companies use it to predict how likely it is that you will pay back a loan on time.
Consumers do not have only one credit score. You have many available to you as well as to lenders and insurers. In addition, the score you get may be different from the ones that businesses use to make credit decisions. Scores can vary from one lender to another, depending on which credit reporting company it was that put together the credit history used to calculate the score. And even when you get a score from the same reporting company used by a lender, the score may still be different.
Therefore, it is important for you to know what information will be most useful when you learn about your credit report and scores. The following key tips should be kept in mind.
- Understand the differences between your credit scores.
There is no one ultimate credit score.
Consumers and lenders have access to several different formulas for calculating credit scores. The score you get will depend on the data that was used to calculate it, and it may differ from other scores depending on the calculating formula, the source of your credit history, and even the day on which the score it was calculated.
Credit reporting companies—which are also called credit bureaus or consumer reporting agencies—are companies that put together and sell credit reports. These companies can collect information from several sources, including:
- Thousands of lenders nationwide
- Public records like bankruptcies, liens, and other judgments
- Collections agencies, which provide delinquent account information
Since these companies calculate scores in different ways and report consumers' financial history at different times, credit scores can change slightly every month.
Both your credit history and your credit score can be hurt by errors in your credit reports, so it is important that you check them regularly. This enables you to keep track of the factors that affect your scores and to make sure your report is correct. By law, you can get one free report from each of the largest three reporting companies every year. To do this, go to AnnualCreditReport.com or call 877-322-8228.
A federal law known as the Fair Credit Reporting Act provides directions as well as limits on the ways in which reporting companies provide credit report information. If you request your reports at the same time, you can figure out whether or not any of them contain errors. If you request them at different times throughout the year, you can monitor them over a long period of time.
Look for the following items when you receive your report:
- Errors in your name, phone number, or address
- Loans, credit cards, or any other accounts that do not belong to you
- Reports claiming that you paid late when you actually paid on time
- Closed accounts listed as being open
- Items that appear more than once, such as an unpaid debt
- Pay all bills on time. You can stay on top of your payments by setting up electronic reminders or automatic payments.
- Do not use too much of your available credit. A credit limit is the total amount of credit that you have. Scoring models take into account how close consumers are to "maxing out" their credit (reaching your credit limit), so try to keep the amounts of credit you use low in proportion to your overall credit limit.
- Be careful about closing accounts. Credit scoring models consider your available credit. If you close some of your credit card accounts and put most or all of your balances on one card, your credit score may be damaged if you are using too much of your available credit. Your score can also be hurt by opening accounts and transferring balances often.
- Having a long credit history will help your score. Credit scores are based on how you use your credit over time. You score will get better the longer you have credit, open different kinds of accounts, and pay your debts on time.
- Apply only for credit that you really need. Scores consider your recent credit activity as a sign of how much you need credit. If you apply for a lot of credit in a short amount of time, it may look like your economic circumstances have gotten worse.
If you find any mistakes in your credit reports, you can contact both the reporting company and the entity that provided the information. Explain—in writing—what you think is wrong and why you think so. Include copies of all documents that support your position. Your credit reports will come with instructions for disputing errors.