The 3 Main Credit Bureaus Plus The Hidden 4th: Meet Innovis
You may have heard the terms credit score and credit report. You may know that your credit score impacts getting a mortgage, a new car, and even insurance for that car. Have you ever been denied a credit card or a personal loan? Did you ever find out why? Do you really understand why your credit score impacts those items?
It all starts with a credit report that lists your entire credit history and ends with a three-digit number. To make matters worse, it may seem confusing when you learn there are different credit bureaus that all report a little differently.
Keep reading to find out more information about all of the credit bureaus, including the fourth one of which you rarely hear.
What Do Credit Bureaus Do?
The credit bureaus are agencies that report credit. They compile details about your entire credit history which allows lenders to determine how risky it is to lend you money. Credit bureaus do not work for the government and work for a profit. They report to banks, credit cards, and other organizations. They also take your entire credit history and turn it into a credit report.
How Credit Used to Work
There was a time when there was no regulation with lending money. The lender decided based on their personal discretion to whom they would lend money. They did not have any concrete information they gathered to decide interest rates or the amount someone could borrow. There was never any guarantee that you would be allowed to borrow money.
As the population grew and lenders lost personal relationships with the customers, it became more difficult to know if someone would or could pay back a loan. The credit bureaus were set up to put some parameters around how lenders made decisions. Now, lenders are able to check the payment and credit history of everyone that wants to borrow money.
Nowadays - Credit Bureaus Collect Information
The credit bureaus collect information like your payment history, the types of accounts you have, the amount of your debt, the length of time you have had credit, and the number of hard inquiries on your credit file. They collect a lot of other information, too.
This information includes your work history such as the jobs you have had and for how long. It also includes your current address and all of your previous addresses. Your credit report shows how long you have lived at those addresses. Lenders see items such as the length of time you held a job or lived at an address as a sign of your stability.
Any negative information on your credit report has an end date. It typically falls off your report after about seven years. A bankruptcy takes about 10 years to fall off your credit report. All the good stuff usually stays on your credit report for about 10 years for the time the account is closed. This could be a mortgage or a car loan.
There are three well-known credit bureaus and a fourth one that is not heard of that often. They each report just a little differently as a result may show a different credit score number for you.
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Credit Bureau #1 - Experian
One of the top credit bureaus is Experian. Their credit scores range between 300 and 850. Their credit score is a FICO 8 score. I will go into a little more detail later about FICO scores. They have a service called credit tracker.
This is a service that you have to pay to subscribe to. This service gives you a copy of your credit report by Experian. This report includes your FICO score, support to resolve fraud, and credit monitoring with alerts via email.
Your credit report has detailed information on every account you have, including debit and credit accounts. It states how much debt you have and how often you pay your bills on time. It also shows how long and well you manage your credit. It contains all of your personal information, including name, address, and even your social security number.
You can access your Experian credit report on their website and you are entitled to one free copy per year. If you find something on your credit report that is incorrect, you can dispute the errors. They have instructions on their website for you to follow. You can also send the documents and information you need via mail.
Credit Bureau #2 - Equifax
Equifax is another one of the top credit bureaus. It provides both FICO and VantageScores on your credit report. They also use a different type of scoring method to determine your credit score.
Equifax credit scores fall between 300 to 850. They also provide a monthly subscription that gives you credit monitoring of your credit scores, credit reports, alerts, and credit freezes.
How Data Breach Affair Impacted Equifax
Equifax has suffered from a huge data breach. While it was difficult for the company and impacted almost 150 million people. Someone hacked into Equifax's system and got a hold of the personal information of those millions of people. That information included social security numbers, credit card numbers, and driver's license information.
Some good things came out of the data breach and that was Equifax's improvements to protect the information and identity of those millions of people. They have made many suggestions to consumers as a result of the breach. One thing they added was two-factor authentication to give you an additional layer of security. This adds another level to the typical user name and password on an account. This means a code must be sent to a phone number or email address that you have on file with the company. This verifies that you are who you say you are.
Using Credit Freezes
Equifax recommends using credit freezes and fraud alerts on your account. A credit freeze means that lenders cannot pull your credit report or credit history. This also means that a lender cannot give you a loan because they do not know how risky you are. This reduces the risk associated with your information being hacked. It also means that no one can get to your information, even those that you want to be able to access it. A freeze stays in place until you take steps to remove it. You also have to pay monthly while the freeze is in place.
Using Fraud Alerts
Another option is to put a fraud alert on your account. This stays in place for 90 days. This is put in place as soon as you request it. When you put a fraud alert on your account, you are notified any time there is any action taken against your credit report, so you know if someone is trying to access your information. When you know, you are able to do something about it.
Credit Bureau #3 - TransUnion
The last of the big three credit bureaus is TransUnion. TransUnion uses credit scores that range from 300 up to 850. They have many credit score categories that start at bad and go to excellent.
If you have a credit score of 550 or below, TransUnion considers that to be a bad credit score. To have an excellent credit score with TransUnion, you need a credit score of 750 or higher.
You can sign up for a subscription service where you pay TransUnion to monitor your credit. With this service, you have the ability to put a credit freeze on your credit report with an additional cost. You are also able to put a fraud alert on your TransUnion credit report. This is a smart move if you think you have been hacked or subjected to fraud. Once you notify TransUnion that you suspect you have been a victim of fraud, they will notify Experian and Equifax
Credit Bureau #4 - Innovis
The fourth of all the credit bureaus collects items that the first three do not.
Collecting Different Data
They collect some valuable data such as rent, utility bills, mobile phone, and gym membership payments. This information is typically harder to capture and the big three do not usually mess with this information too much.
In the past, this data was not regarded as that important and there was not a standard for collecting it. Well, the times are changing because the Consumer Financial Protection Bureau is beginning to look a little deeper into this information.
There are close to 30 million people that rely on the data collected by Innovis because they do not have much in the way of traditional credit. They have not rented an apartment or gotten a loan for anything, so their credit history is not long. They do, however, pay all of their bills on time. They just have not needed a loan or a credit card. The information captured by Innovis can show that you are reliable and not a risk.
The downside about this credit bureau is they are not legally required to provide one free copy of your credit report per year. If you want a credit report from them, most likely you are going to have to pay for it.
What Is Credit?
Let’s explain some basics now. Credit is the ability to purchase items today with the promise to pay for it at a later date. You can get items even if you do not have the cash for them. Credit takes a long time to build. If you are young, you do not have much credit. If you have not obtained a loan for a car, received a credit card, or rented an apartment, you may not have much credit. When you take out a loan, every time you make a monthly payment on time, you are improving your credit score.
Credit is compromised of several different factors. Information is reported to the credit bureaus. They are interested in how many jobs you have had and for how long. They are interested in how much credit you have obtained over the years and how you have used it. They look at credit utilization and debt to income ratio. Credit utilization is how much of the open credit you are using. Your debt to income ratio is the amount of debt you carry in relation to your income.
What Is On My Credit Report?
While the top three credit bureaus may have different credit scores, most of the information contained in your credit report is the same.
Credit History
Your credit report shows your payment history. This is where it gets tricky. Some companies do not report when you have made a payment on time and in the correct amount. They only report when you do not make a payment on time. There are some companies that report the good, the bad and the ugly on a regular basis to the credit bureaus.
Credit Utilization
Your credit report also shows how much money you owe and to whom. The credit bureaus want to know how close you are to using all of your available credit on your credit cards. This is your credit utilization. Believe it or not, it is better to have two credit cards, both with a credit limit of $3,000, for a total of $6,000, than to have one credit card with a credit limit of $4,000. It is also better to have a balance of $1,000 on each of those cards instead of a $2,000 balance on one card. It looks better when it comes to credit utilization.
This is the way it looks in numbers
Scenario 1 - 2 credit cards each with a credit limit of $3,000. Total credit limit is $6,000. Each credit card has a balance of $1,000. This means you are utilizing $2,000 of $6,000. That's about a 33 percent utilization rate. This is still a bit high, as lenders prefer to see it around 30 percent or less.
Scenario 2 - 1 credit card with a credit limit of $4,000. You have a balance of $2,000. You still have the same overall credit usage, but you are utilizing $2,000 out of $4,000, which is a 50 percent utilization rate. That is bad as far as your credit is concerned.
Your credit report also shows the length of your credit history. The longer your credit history is means the better your credit score will be. Those who are young, or do not have much in the way of a credit history tend to have lower credit scores.
What Is A FICO Score?
The Fair Isaac Corporation (FICO) is the three-digit credit score that the credit bureaus have been using for quite some time in the US. It was intended to be an unbiased way for lenders to make decisions about loans that did not indicate gender, race, or religion. It is a three-digit number that gives an indication to lenders of your creditworthiness. There are some other factors that go into determining this number. Some of these terms you will recognize because I have talked about them throughout this article.
Your credit utilization is one part out of five when it comes to determining your FICO score. Your credit utilization accounts for 30 percent of your credit score. This ratio is your outstanding debt and how it compares to the available credit that you have. More simply stated, this is the amount you owe on your credit cards compared to your credit limit. Your payment history is about 35 percent of your total credit score. When you pay your bills on time it has a positive impact on your payment history. The more credit that you have with timely payment histories are good for your credit score.
Another factor in determining credit score is your credit history length. Those with only a little bit of a credit history may have a low credit score because they have not had enough time to build up proper credit. This is 15 percent of your credit score. A FICO score looks at the age of your oldest and newest accounts and determines the median of the entire bunch.
Believe it or not, but the mixture of credit you have impacts your credit score. This is 10 percent of your credit score and counts credit cards, mortgages, all types of loans, and store credit cards. The more you have mixed your lines of credit, the better it is reflected in your credit score. Lenders like when you have a good mix of credit available to you. 10 percent of your credit score is focused on new credit. If you have opened up many different credit lines in a short amount of time, it is negatively reflected in your credit score.
What Is VantageScore?
As if your credit score and credit report was not confusing enough, the credit bureaus got together to make it better. In the end, I am not sure they achieved their desired result. Either way, VantageScore is the outcome of the three credit bureaus coming together to figure out a better way to collect data and create a three-digit score to determine your creditworthiness.
In 2006, they revised the FICO system and came up with VantageScore. This system is jointly owned by the major three. This intention of this was to simplify the way the number is computed and for all three credit bureaus to come up with the same number.
Percentages of a VantageScore
I am sure it does not surprise you that the percentages of the five major categories are different with VantageScore.
Your payment history is 40 percent of your VantageScore. This has a higher percentage because if you do not pay existing bills on time, why would you pay new bills on time? The length of your credit was changed to a fancier term called your depth of credit. This is worth 21 percent of your VantageScore. This is a combination of the length of your credit history and your mix of credit.
Your credit utilization is 20 percent of your VantageScore. While it is less than the FICO calculation, it is still significant. Your current amount of debt counts as 11 percent of your Vantage Score. Your recent credit counts as 5 percent of your recent credit. Your available credit counts as 3 percent of your VantageScore. This is closely related to credit utilization except this is focused on actual dollar amounts instead of the percentage of credit used.
Bureaus’ Credit Monitoring
I would love to tell you that credit monitoring is simple, but the credit bureaus each have their own way of monitoring your credit. If you want all of the credit bureaus to monitor your credit, you have to contact each of them separately. For the most part, all of the big three charge you for them to monitor your credit. You can take your chances and just pick one of them and hope that it gives you enough coverage.
Credit monitoring is when you utilize a service to pay direct and specific attention to your credit reports, yes all of them, and it lets you know via alerts if something changes on your credit report. If you receive some alert that there has been a change to your credit report, you need to look at it immediately. If you did not do whatever sparked the change, then you need to address it. There is no sense in monitoring your credit if you are not going to do something about the issues when they appear.
How Can I Improve My Credit?
In addition to credit monitoring, you should pull a copy of all of your credit reports each year.
Examine Your Credit Reports
Remember, each one of the big three have to give you one free copy per year. Take advantage of it. Once you pull them, look at them critically. You are looking for things that are incorrect. If there is something wrong with any of your credit reports, dispute it right away. Most of the credit bureaus allow you to file a dispute directly on their website. Just fixing mistakes on your credit report can improve your credit score.
Lower Your Debt
The next thing you want to do is pay down your debt as quickly as you can. You want to get your debt to a manageable place. This will also help to improve your credit score.
Pay Bills
Make sure that you pay all of your bills on time. One of the biggest reasons why your credit score drops is late payments. Many companies do not report timely payments, but they are quick to report late payments. They report it so fast, it will make your head spin.
Don’t Max Out Your Credit Cards
Another way to improve your credit score is not to have your credit cards close to their limit. If they are, pay them down as quickly as you can. You want to leave yourself some available credit so you have room, in case you need it.
Control Your Spending
This is another great way to control your credit score. I know this may not make a lot of sense on the surface, but hear me out. If you are in control of your spending, then you may not use your credit cards as often. You will be able to pay them down quickly. You may even get to a place when you can pay your entire credit card balance each month. Now, see how it makes more sense that controlling your spending can really improve your credit score.
You should take control of your money. Do not let it have control of you. You should be in control of your spending choices. This does not mean you have to deprive yourself of the items you want. It simply means that you are thinking about the money you are spending before you spend it. Even if it is not coming directly out of your checking account, you should think about it as if it is. Think about the long term impacts of the money you are spending today.
Conclusion
No matter where you are on your credit journey, it is important for you to understand credit and what it is. Not only that but you need to understand how your credit is reported and its impact on your credit score. If you still do not think you have a good understanding of credit, credit scores and your credit report, do more research.
You need to make sure you understand these items before you use any more credit or get another loan. You need to understand how every bill you may or do not pay impacts your credit score. Once it impacts your credit score, it impacts every aspect of your everyday life.