3 Credit Bureaus Approach to Determining Your Score
There Are THREE Credit Bureaus?
I suppose if we’re going to talk about the ways in which each of the “Big Three” Credit Bureaus determine your credit score, we should start with who and what these “Big Three” Credit Bureaus are, yes?
There are numerous credit bureaus across the U.S., but the three we care about are Equifax, Experian, and TransUnion. The most important thing they do (for our purposes) is offer lenders access to a three-digit “credit score” reflecting your estimated creditworthiness – the likelihood you’ll be willing and able to repay a loan. They can also provide a fairly complete “credit report” documenting your history with previous loans and repayment, along with specific additional information about you.
How Do the 3 Credit Bureaus Determine Your Credit Score?
The three major credit bureaus work in very similar ways, but they’re not friends – they’re competitors. They may seem largely interchangeable to the average consumer, but each may have different information about you. Even if they use similar methods of calculating your credit score, they may come up with slightly different results.
And while 90% of your credit report should look basically the same from each of the “Big Three” Credit Bureaus, it’s possible one will show different positives or negatives than another. Before digging into the different approaches that these bureaus take when determining your credit score, let’s clear up some basics like what a credit report is and how it is related to credit score.
What Shows Up On My Credit Report?
The typical credit report has four general sections to it. If you ask for a copy of your credit report, you’ll generally receive a somewhat condensed and simplified version, but it should still have all four sections. Lenders usually request the fuller, longer version.
Identifying Information
Your name, address, date of birth, SSN, etc. Your current and previous employers will be in this section as well, but not your income. In this case, your employment information is part of your identification. Credit bureaus will NOT gather or report demographic information like your race or religion. It’s prohibited by federal law because some lenders might make lending decisions based on their personal prejudices and that’s a violation of your civil rights.
Previous Inquiries
The times your credit has been checked by a third party. Most lenders are only interested in “hard inquiries.” These are credit checks done when you’re actually applying to borrow money or secure some other form of credit. You have to give your permission for these, so none of them should be a surprise. Too many “hard inquiries” can have a negative impact on your credit.
If you ask for a copy of your own credit report, it should include “soft inquiries.” These are checks made for other reasons – as part of a background check by anyone thinking about hiring you, assessing you as an insurance risk, etc. These aren’t the intended purpose of credit checks, but anyone who can demonstrate a “valid” reason can run this sort of check on you. Unlike a “hard inquiry,” these don’t impact your credit one way or the other.
Current and Past Credit Accounts
Credit cards, automobile loans, mortgages, student loans, etc. Anything you’ve ever borrowed or credit you’ve ever used theoretically shows up here, along with the current status of the loan. A full credit report will include the amounts of the loan and each payment, any late payments or other problems, and the date you paid or are anticipated to pay the account in full.
Public Records
This used to include liens filed against your property or any legal actions impacting your finances, but those things have been largely scrubbed by national consumer protection legislation. Now it’s mostly recent bankruptcies.
Are There Different Credit Reports from Different Credit Bureaus?
Sort of. Your credit report should look largely the same no matter which of the “Big Three” Credit Bureaus is being utilized, but there can be minor differences. If there are major differences, something has gone wrong. That’s why it’s important to periodically check your credit report from all three major credit bureaus. Some folks even opt to subscribe to a credit monitoring service to help keep up with it all.
Why They Can Deffer?
There are three reasons your information might differ between credit bureaus.
The first is that not all lenders use all three services. Smaller, local businesses – automobile dealers, landlords, or medical providers – may only report delinquencies to the credit bureau they use to pull reports and scores. If they use Equifax, for example, to pull reports and credit scores on their customers, they may only report problems to Equifax. Your credit history according to TransUnion or Experian remains slightly higher as a result.
Third-party collection agencies are particularly bad about this. They tend to only report severe delinquencies to their preferred credit bureau. Somewhat ironically, the more difficulty you’ve had keeping up with your bills, the more likely your credit report will look different depending on which of the “Big Three” Credit Bureaus is being consulted.
The second possibility is simply that someone made an error along the way. Credit bureaus process and store an insane amount of detailed information. Most of their data has at some point been entered by a human being and given enough typing by enough humans, there will at times be mistakes. Most are caught before they can become a problem, but we’ve all noticed things in our personal or professional lives that we can’t imagine how they slipped through.
(I assure you, as someone who does quite a bit of writing, that no matter how many times you proofread a piece, you’ll never catch the last, most embarrassing error until it’s published.)
You can challenge or correct information in your credit report by contacting the appropriate credit bureau and providing as much detailed information and documentation as possible. It can be a pain, but it’s not as difficult as it sounds. It can be time-consuming, however, which is why you shouldn’t wait until you’re trying to secure a mortgage or finance an automobile to do a score check and request your own credit reports. Better to avoid any surprises!
A third, far less common occurrence, is that recent information – an account you’ve finally paid in full or payments you’ve recently missed – may show up at one of the major credit bureaus but not hit the other two for another 30 days.
The majority of the time, however, your credit report from any of the “Big Three” Credit Bureaus will read very much the same. Your credit score should align pretty closely from one source to the next. If it doesn’t, there’s a problem you need to track down.
How Does My Credit Report Relate To My Credit Score?
Credit reports can be rather detailed, messy things to wade through – especially the full versions often consulted by major lenders. Not everyone wants to take that kind of time, at least not every time. The process also introduces a level of subjectivity that makes major financial institutions uncomfortable. They prefer “objective” numbers.
You’ve probably received a report card or two in your life. Here’s a secret from the world of education – most teachers hate letter grades and the oversimplification they require.
If it were practical to do so, they’d sit down with students and parents and talk about relative strengths and weaknesses, how much each student has or hasn’t applied themselves, which skills they’ve mastered and which require further practice, what behaviors have been appreciated and which cause concern, and generally talk real talk. They’d listen to input and feedback from both students and parents in return. To be most effective, these discussions would be ongoing and involve one-on-ones with the student as well as whole-class instruction or small group activities.
None of that’s practical in the time teachers have at their disposal, however, so you know what we have instead? Every 18 weeks or so, you get a form in the mail that says something like:
English – 81% - B
Algebra – 72% - C
History – 90% - A
P.E. – 100% - A
And so forth.
The letter grades and percentages are an attempt to take a range of information about you and boil it down to something quick and easy to understand. That’s both the strength and the weakness of the system.
Credit scores do the same thing with your extensive credit information. They’re an effort to boil down complex information into something quick and easy to understand. Your credit history is run through some calculations to produce a three-digit number, which in turn lands you in one of five basic categories of creditworthiness.
Understanding credit score factors is key to understanding the results – those three-digit numbers and the categories into which your number lands you. They’re also the most basic way to understand how to improve your credit score. If you know what raises or lowers your score, you’re better able to make decisions that will impact the results.
Do Different Credit Bureaus Give Different Credit Scores?
Yes. Sort of. No. Well… yes.
Confused yet?
Most of the time when we’re talking about credit scores, we talk about them as a singular thing. That works for most situations. Until you get down to the details, we don’t need to worry too much about the quirks of each. It’s like asking, “Do you want to order pizza?” At some point, you’ll have to figure out who you’re going to call and what toppings you’d like, but for the most part, we all understand the basic concept of “ordering pizza.”
If asked the next day what we did the night before, we’re unlikely to provide a printout of the various toppings, sauce modifications, and flavored crust options chosen by each member of the group. We’ll probably just say, “We ordered pizza.” If we want to get REALLY detailed, we might add, “I shouldn’t have added the peppers.”
This analogy is worth remembering as we talk about the different types of credit scores. It’s good to have a basic understanding of different types of credit scores and where the numbers come from, but the keys to having a good score – or, rather, good SCORES – is the same no matter which version is consulted by which lender:
·Pay your bills on time.
·Avoid unnecessary debt.
·Pay your bills on time.
·Don’t be afraid of utilizing different types of credit over time, within reason.
·Pay your bills on time.
·Go easy on the credit cards.
There was one more, but I can’t seem to-- Oh! Yes – I remember now…
·Pay your bills on time.
Different Types of Credit Scores
The pepperoni and sausage of credit scores are the FICO and VantageScore. Each utilize a three-digit number between 300 – 850 to offer lenders a “snapshot” of your estimated creditworthiness. We’ve broken down the factors each considers in greater detail elsewhere, so we’ll just hit the basics here.
Your FICO score stirs in each of the following elements in roughly these proportions:
·35% - Your payment history. How often are you late, and how late are you?
·30% - Your credit utilization ratio. How much money COULD you be borrowing right now compared to how much you’re actually borrowing right now.
·15% - Length of your credit history. How long and how often have you borrowed and repaid successfully?
·10% - Your credit mix. What sort of variety of credit have you utilized successfully in the past?
·10% - Your recent credit efforts. How many loans have you applied for recently?
FICO Score
VantageScore is similar, but emphasizes a few things a bit differently:
40% - Your payment history. This is similar to FICO, but weighted more heavily.
21% - Length and variety of your credit history. This is a mix of two FICO categories with an extra focus on your ability to juggle different sorts of debt at the same time successfully.
20% - Your credit utilization ratio. Same category used by FICO, but weighted less heavily.
11% - Total currently owed. This one is unique to AdvantageScore and includes past due balances as well as debt you’re doing just fine paying for each month.
5% - Your recent credit efforts. Like FICO, this is a function of how often you’ve been applying for credit.
3% - Current credit available. This is related to your credit utilization ratio, but this category refers to dollar amounts rather than percentages.
VantageScore
That Wasn’t So Complicated…
Neither is ordering pizza. But I’m oversimplifying. Sorry.
The reality is, we know the basic percentages, but not the actual calculations used to produce your credit score. Plus, each of these basic “flavors” of credit score has numerous varieties. For better or worse, a pepperoni pizza from Domino’s isn’t the same creature as the one you’ll get from Papa John’s. It’s not about which one’s better – they’re just different.
Experian – one of the “Big Three” Credit Bureaus – puts it this way:
Credit scores are calculated using computer programs known as scoring models. Scoring models perform sophisticated statistical analysis on the contents of your credit report—your history of borrowing and repaying debts, as recorded by the three national credit bureaus: Experian, Equifax, and TransUnion…
Models developed by different companies, such as the FICO® Score* and VantageScore®, differ in how they calculate and report scores. There are also often multiple versions of a given model available from its developer (something like different versions of Windows or Android) and specialty models designed for specific industries…
Before your head starts to spin, let’s jump back from our pizza analogy to the report cards we discussed above. Your percentages can be computed in all sorts of ways, and no two teachers seem to do it exactly the same. The results, however, are gathered into far more general categories that tend to be the same no matter how the score is computed. It’s only when you’re right on the border of one category or another – do you have an 89.7% or a 90.1%? – that the details matter.
Credit scores from any of the major credit bureaus are the same way. Your three-digit number matters, but it also places you in one of five general categories – “Poor,” “Fair,” “Good,” “Very Good,” or “Excellent.” (those are FICO categories – of course, VantageScore has slightly different names and ranges because… why not?)
Finally, Which Credit Score(s) Should I Care About?
There’s certainly some value in checking all three scores from time to time and reading through your complete credit report before making any major financial decisions or applying for a loan. When applying for a loan you have to be very well-informed! And here at Goalry we can help you do so. We can connect you with a suitable lender based on your credit score. You just need to fill in the form below:
My goal in talking through different credit scoring models and discussing different credit bureaus is to help you be LESS stressed by staying MORE informed.
There are too many myths and misunderstandings about credit scores and credit reports and how they work. As long as you understand the basics, you don’t usually have to worry about the details. Control the parts you can control, and if you find you need a little help, just let us know.
In the meantime, for some reason, I’m craving pizza. Wanna order delivery?