What Is a Credit Report and Credit Score

Although most of you will be aware of what a credit report and credit score is. It is explained here.

What is A Credit Report?

All your credit related transactions which includes credit card payments, mortgage, automobile loan etc. are recorded in a document known as the credit report. Along with recording the details of particular credit account (credit card account, home loan account, personal loan account, auto loan account etc.) such as the amount of money borrowed, the balance, the interest rate, payment history, a credit report records late payments and delinquent accounts as well.

Similarly a credit score is the three digit numerical number that is calculated using the information present on your credit report. A credit report and a credit score reflect the creditworthiness and the risk of an individual to a lender.

What Information does it contain…

A credit report contains personally identifying information such as name, address, where you work as well as your social security number.

It contains a list of the credit accounts that are functioning under your name. Only credit accounts are included like credit cards and loan accounts. Your bank savings account and investments have nothing to do with your credit report

It contains a record of your payment history of the payment you make against your bills on credit related accounts. Any late payments or delinquent accounts are also mentioned.

Who makes the credit reports…

Credit report are compiled by agencies known as credit bureaus. The three major national credit bureaus are Equifax, Experian and TransUnion. So you are going to have 3 major credit reports from each of these major credit bureaus. In most cases you should expect the information on each of them to be an identical reflection of each other unless one of your lenders reports to one and not the other.

National credit bureaus collect information from lenders and creditors all over the country such as credit card providers, banks, loan providers and any other creditor with whom you do business with as long as that creditor has chosen to report and share information with national credit bureaus.

Not all creditors report to all the three national credit bureaus while some may not report to even one. This,  however, is rare.  You cannot have an account included in your credit report if the lender does not report to that credit bureau. It is the lender’s choice.

The primary business of the national credit bureaus is to compile information about the credit history of consumer and sell it to businesses who further base rate credit decision on the credit report.  Not all businesses can view the credit report for a consumer.  The people who have excess to view the credit report of a consumer is limited by the “permissible purpose” as defined by the Fair Credit Reporting Act (FCRA).

How is information for credit report collected…

Conversely these same lenders and creditors work on a information sharing basis with the credit bureaus. All the creditors that subscribe to the national bureaus to view credit reports of individuals also share the credit information that they have on their existing consumers.  The report payment history, loan account details and any other delinquency. Another source of information for the National credit bureaus are the public records.  Filing for bankruptcy, tax liens and judgment passed in small and federal courts are also listed on the credit report.  Only the rulings of the court that concern credit related issues are recorded.  Other records such as criminal record is omitted from the credit report.

Checking your credit report periodically is important for maintaining sound financial prospects.  Since almost all the creditors rely on the credit report and the credit score to judge your credit worthiness before they give you a loan, keeping your report accurate and up to date is important. Usually this takes care of itself, but there is no harm in checking yours if you suspect that there might be something amiss on yours that could prevent you from qualifying for a loan in the future. Forewarned is forearmed.  You should do all he can to make sure that the information being reported on your credit report is positive and healthy.

You can obtain a credit report by contacting any of the three national credit bureaus.  The FCRA also allows you to get a free copy of your personal credit report from each of the three national credit bureaus once in 12 months.  This means three free credit reports in the year. You can get these from www.annualcreditreport.com

What is A Credit Score

The credit score or a person is a numerical value that ranges from 300 to 850.  A credit score is the summarization and reflection of the information present on your credit report.  While the lender can come to the same conclusion about your creditworthiness by viewing you credit report, the credit score provides an easy reference to the lenders to assess your credit risk before making a decision about extending alone credit card.

Consumers with a higher credit score a consent to be less risky borrowers and with consumers who have a lower credit score.  While consumers with different credit scores may qualify for a loan as long as it is above the threshold for the limit of a creditor, it is common that a consumer with the lower credit score gets charged higher rate of interest on credit cards and other kinds of loans.  If the credit score is lower than the qualifying threshold limit for certain creditors the consumer may be denied alone altogether.  There are various different credit scoring models in use today.  In fact it is estimated that hundreds of such credit scoring models are in existence.

The reason is that many lenders prefer to use specialized scores that cater to their specific lending decision-making needs.  For example, the requirement of a credit card provider may be very different from an insurance or a mortgage loan provider.  However, the most widely used version is the FICO score model named after Fair, Isaac Corporation.  There are several versions of the FICO score model in use today.  More recently a new scoring model called the VantageScore has been developed which ensures uniformity amongst all the three national credit bureaus provided that the information present with all three of them is the same.  Although the credit score may differ from one model to another, the risk and the creditworthiness that it represents according to its own scale of measurements is typically almost the same. Credit scores are not included along with the free annual credit report that you can get from www.annualcreditreport.com.  You can purchase the score separately from other of the three credit bureaus or directly from my FICO.com.