Credit scoring has been around for a number of years. Various creditors have had their own type of credit scoring models going back to at least the 1980s.
Today, while some lenders still maintain their own type of credit scoring models, most use the credit bureau scoring models which are called Fair, Isaac Credit Bureau Scores. Each of the three major credit bureaus use a FICO score based on the same base model with a different name used for each credit bureau. The FICO scores are based on the data contained in each of the separate credit bureaus so that it is quite possible, and quite likely, that you would have different FICO scores for each bureau.
- Equifax refers to their FICO score as a BEACON score
- Experian refers to their FICO score as the The Experian/Fair Isaac Model - most people, particularly within the lending community often relate the FICO score with the Experian credit report
- Trans Union refers to their FICO score as the EMPERICA score.
The credit scoring system is based on a statistical means of determining how likely it is that a borrower will pay back a loan. Lenders use this score to determine the level of risk involved in a lending decision. The FICO score does not take into account the income of the potential borrower, the assets, bank account information, again, it simply uses the information provided within the credit report to determine a score. The score is a "snapshot" of the current credit report information at the time it is requested. In other words, the score is computed when the credit report is pulled it is not a "score" that sits on your report until something changes. It is not part of your credit report and you will not get a copy of the score when you get a copy of your credit report.
Here are some items that are considered in determining your credit score:- Tradelines
- Inquiries
- Collections
- Public Records
- Previous credit performance
- Current level of indebtedness
- Amount of time credit has been in use
- Pursuit of new credit
- Types of credit experience
A very high percentage of your score is based on the items in bold. As a matter of fact, as much as 75% of your score is based on these factors. Here is a further explanation of those items below.
- Previous credit performance - your credit history. This looks at your accounts and determines how those accounts are/were paid. See my article on credit disputes for more information.
- Current level of indebtedness - This looks at the average balance of your revolving trade lines, the ratio of revolving debt to your total revolving limits.
- Percentage outstanding on open installment loans.
Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.
Credit scores analyze a borrower's credit history considering numerous factors such as:
- Late payments
- The amount of time credit has been established
- The amount of credit used versus the amount of credit available
- Negative credit information such as bankruptcies, charge-offs, collections, etc.
There are really three FICO scores computed by data provided by each of the three bureaus––Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score.
Standard procedures to update your credit report.
There are standard procedures to get rid of mistakes on your credit report.
But, remember that erasing report errors can take time. As the wheels of correction grind slowly, there may be weeks -- or even months -- of phone calls and exchanging of real mail or e-mail.
If you believe an error was made by a company you've done business with:
Contact the company directly, asking that a written statement of the error be sent to all three credit bureaus.
Make sure you follow up with all three credit bureaus to guarantee that the changes have been made by the merchant.
Make photocopies of any documentation that supports your claim.
Write a letter to each credit bureau that lists the mistake, stating what is wrong, including your full name, your middle name, address, date of birth and Social Security number. Always remember to note whether you are a junior or senior (Jr./Sr.).
If your name is mixed up with someone else's, include a copy of your birth certificate. If there is an inscrutable error, such as confusion with another person of the same name, the process can be quite lengthy. Mistaken identities take a long time to clear up on a credit report; however, you are entitled to submit a 100-word or less statement to each credit bureau explaining the situation. It's a good idea to send it by certified mail, with a return receipt. Your statement will be included with the credit report when anyone makes an inquiry into your file, and it may help ease things while the problem is being worked out.
If you disagree with a credit bureau's findings, you also may insert a statement in your credit report without a charge. The statement must be included every time the report is sent out. Send the letter by certified mail and keep the receipt and a copy of your letter.
Remember, you do have rights:
Under the Fair Credit Reporting Act, the credit bureau is required to solve the problem in a reasonable amount of time, generally 30 days.
If you feel that a credit bureau has not responded promptly and fairly to your situation, contact the attorney general of your state or the Federal Trade Commission in Washington at 202-FTC-HELP.
Any correct negative information may remain on the report for no more than seven years from the date of the last activity. Bankruptcies may be reported for 10 years.
If you have mistakes on your report or even if you have real problems, there still are ways to get the loans you want.
Contact information for the credit bureaus
Equifax
Equifax Credit Information Services, Inc
P.O. Box 740241
Atlanta, GA 30374
1-888-766-0008
Web site: www.equifax.com
Experian (formerly TRW)
National Consumer Assistance CenterPO Box 2002
Allen, TX 75013
1-888-397-3742
Web site: www.experian.com
TransUnion
Consumer Disclosure Center
P.O. Box 1000
Chester, PA 19022
1-800-888-4213
Web site: www.tuc.com
Frequently Asked Questions (FAQs)
How can I increase my score? While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time.
Pay your bills on time. Late payments and collections can have a serious impact on your score.
Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.
Reduce your credit-card balances. If you are "maxed" out on your credit cards, this will affect your credit score negatively.
If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score.
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