What is a Credit Score/Report?
In modern media – television, social media, online articles — we often see mentions of credit scores, and how important they are to success in everyday living. Although they’re referenced at nauseam, too many people don’t understand the true meaning of credit scores or reports.
Let’s dig into the barebones basics of credit scores and credit reports, how they work, their potential impacts on living, and more.
What Are Credit Scores?
Credit scores are three-digit numbers ranging from 300 to 850 that indicate general financial risk in consumers. While credit scores are rarely at either end of the spectrum, lower scores indicate higher risk, and vice-versa.
It’s important to understand that credit scores, just like any standardized scores, cannot accurately identify risk 100 percent of the time. However, they’re actually quite accurate in providing lenders, renters, and other businesses with ideas of how likely consumers are to make good on promises to pay.
Credit scores are calculated with help from advanced mathematical algorithms; more or less, long formulas that weigh various factors in consumers’ financial histories.
What Different Kinds Of Credit Scores Are There?
The industry’s “gold standard” of credit scores is the FICO – the Fair Isaac Corporation was the first to offer standardized credit scoring – credit score. While few organizations use other models, there are three widely-accepted alternatives to the basic FICO score: TransUnion, Equifax, and Experian.
TransUnion, Equifax, and Experian are credit bureaus that provide consumers with information related to their credit scores and associated reports. Each organization uses credit-risk scoring models of their own. When consumers seek out their credit reports, they typically receive briefings from each of the credit world’s “big three” organizations – Equifax, Experian, and TransUnion.
What Exactly Factors Into Credit Scores?
The intricacies of credit-risk scoring models are far too complex for beginners to understand – even for experts to understand – and are beyond the scope of this article.
However, scoring models are generally split into five sections, in terms of consumers’ financial histories:
- 35 percent – Payment history, like unpaid accounts, public records of defaults, etc.
- 30 percent – Outstanding balances, the most important of which are outstanding balances on credit cards currently being used.
- 15 percent – Length of credit history, including age of currently open accounts, and length of time since your accounts’ most recent activity.
- 10 percent – What types of credit you use can say a lot about your lending risk.
- 10 percent – How frequently you pursue new lending opportunities, like lenders’ requests for your credit reports to make lending decisions, and how many accounts with credit card companies you’ve opened recently.
What Are Credit Reports?
Credit scores, as you remember, are three-digit numerical values that inform businesses of consumers’ general financial risk.
Credit reports, similarly, are detailed records of consumers’ financial activity throughout the past. They include information to identify consumers, like past addresses lived at and phone numbers used, as well as current outstanding balances on credit cards and other loans.
Businesses can even find information including past employers, any liens outstanding against cars or homes, active wage garnishment agreements, past bankruptcies, and other intimate details of consumers’ financial, occupational, and personal lives.
How Can Consumers Get Credit Reports?
Several sites online offer free glimpses at your credit score and reports to back them up. According to the Fair Credit Reporting Act, TransUnion, Experian, and Equifax must provide consumers with one free credit report every year, if they request so.
Consumers can request credit reports by visiting these companies’ official websites.