Credit Reports and Scores: FAQ
What is a credit report?
Simply put, it's the historical account of your financial activity.
Why does it exist?
Generally not for your benefit. Credit histories are compiled for and made available to lenders and companies interested in your background so they can evaluate your risk as a client, whether it's your ability to repay loans or the likelihood you'll file claims on insurance. For more information: Who Checks Your Credit Report?
What's a credit score?
The score is a numeric representation of the risk you pose. Credit bureaus assign value to behavior and punch it into an algorithm. Out pops a number. The higher it is, the less risky you are. This makes it easy for interested parties to quickly size you up as a potential client.
What's a FICO score?
FICO, an acronym for Fair Isaac Corp., refers to the best-known credit score model. Almost all credit scores were either developed by Fair Isaac or based on its system.
Does it matter whom I get my report or score from?
No and yes. Among the three big bureaus, Equifax, Experian, and TransUnion, one is not necessarily better than the others. But for your own good, it's best to get your score and report from all three. Lenders will often look at all scores, then discard the lowest and highest score and go with the median, kind of like judging figure skating. You'll want all three to make sure they're consistent across the board.
Why would my scores be different?
Each bureau uses a slightly different calculation, a variation of FICO, to get your score. Also, the three bureaus might not have all the same information on you. One bureau might be missing information, while another might be reporting activity that isn't yours. That's why it's best to receive all three reports to find mistakes or signs of identity theft.
How do I interpret the number?
Credit scores usually range from 300 to 850. For the most part, anything above 720 will earn you creditworthy status, while anything below 620 is considered high risk. The higher your score, the better deals you'll be getting on insurance and loans.
How is my score calculated? What do the bureaus consider?
In approximate order of importance:
• Payment history: how many times you've defaulted on a payment. It notes how late you were (30, 60, 120 days) and how long ago that was. If you were late on a payment by only a couple of days, that won't affect your credit score at all.
• How much you owe: For credit cards, the score takes into account how much of your credit limit you're using. The less the better. Thirty percent of your limit is ideal. As for installment loans (student loans, for instance), bureaus look at how much you owe at that time versus how much you owed when you first took out the loan. The score will reflect positively on a borrower who consistently pays off his debt.
• Duration of credit: The longer you've had a credit line, the more stable you look. The bureaus calculate the age of your oldest account and the average age of all your accounts.
• The last time you opened credit: A flurry of credit activity will seem questionable, which is why opening three accounts at once can hurt your score.
• Types of credit: The more diverse, the better. Diversity does not mean Visa, MasterCard, and American Express. Lenders like to see the two types of loan: revolving (like credit cards) and installment (like student loans).
How do I get my score?
Go to myfico.com, a joint venture by Equifax and Fair Isaac, to get your three reports and scores for about $50. You can also go straight to the websites of the three bureaus, where you can get your credit reports (but not the scores) free of charge once every 12 months. Also, be on the lookout for outfits that are just trying to harvest your personal information.
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