Free Annual Credit Report

What is My Credit Score?

What is my Credit Score?
Is my Credit Score high enough?
Do I have good enough Credit?

Every financial planner will tell you that the number one thing that you need to protect is your free annual credit report. However, how are the credit scores on this report calculated? A variety of credit-scoring statistical models are used to generate credit scores, each of which used unique algorithms. The primary source for credit scores used in mortgage lending decisions are the three national Credit Reporting Agencies: Transunion, Equifax, and Experian. These Bureau collectively store over 450 million files on individual consumers and process over 2 billion pieces of consumer credit data each month. Each bureau has a number of exclusive proprietary credit-scoring models that generate unique credit scores, and consequently, consumers can have more than one credit score.

Credit-scoring models are based upon credit reports of consumers who have acquired credit in the past. These credit reports are statistically analyzed to identify characteristics that predict the likelihood of debt repayment. Each of these characteristics is then assigned a weight based on how well it predicts the likelihood of repayment.

Four categories of data are collected and reported in a credit report: personal information, credit information, public record information, and inquiries. The three credit bureaus independently collect data used to build a consumer credit report.

Five general categories of data are gathered from credit reports and used in credit-scoring models: previous payment history, amount of money owed, length of credit history, amount of new credit sought, and types of credit in use. In accordance with the Equal Credit Opportunity Act, factors include gender, income, race, religion, marital status, and national origin may not be used in credit-scoring models.

Credit scores represent a snapshot of the consumer’s credit history at the time the credit score is generated. Bureaus continually receive new information and update credit report files, and, therefor, consumers’ credit scores can frequently change.

If you are interested in getting a copy of your Free Credit Scores, head over to Free Annual Credit Report and get yours in less than 5 minutes.

FICO is an acronym for Fair Isaac Corporation often refers to the best-known credit score in the United States which is calculated using mathematical formula developed by this company. This score is one of the most important factors in obtaining credit in the United States. For institutions that use scores as a factor in their lending decisions, scores below certain numbers may result in denial of credit, or credit being offered at a higher interest rate. This is different than the Free Annual Credit Report that you are entitled to yearly.

The three major credit reporting agencies in the United States, (Equifax, Experian and TransUnion) calculate their own FICO scores, which go by different trademark names as well as many different versions of the score: For example Beacon, Beacon 96 and the Pinnacle are all available only from Equifax; Empirica Empirica Auto 95 Precision Score and Precision 03 at Trans Union, and Fair Isaac Risk Score at Experian. These versions, while all developed for the agencies by Fair Isaac, differ and are periodically updated to reflect current consumer repayment behavior. The NextGen Scores are the most recent scores, but creditors vary in which version they prefer to use.

The scores use a multiple scorecard design. Each version uses 10 or more individual scorecards, and an individual is typically compared with similar others. An individual is then graded according to what variables seem to indicate a repayment risk in that group. This feature may cause a borrower with delinquencies to score in the same range as a borrower without delinquencies.

It is worth mentioning that each of these credit reporting agencies also have developed their own separate proprietary versions of a credit score intended to compete with Fair Isaac’s score. Although not as widely used, these scores are less expensive than the FICO score and, in some situations, may more accurately predict the risk level of a prospective borrower. The cost savings of a non-FICO score are tempting to some banks and credit card companies, who need an accurate risk assessment on millions of accounts every year. Only time will tell if these alternative scores will displace Fair Isaac from its dominant position in the U.S. market for credit scores.

Nearly all large banks also build and use their own proprietary statistical models for credit scoring purposes, often in conjunction with the FICO score or other outside scores.

The statistical models that generate credit scores are subject to federal regulations. The Federal Reserve Board’s Regulation B, which implements the Equal Credit Opportunity Act, expressly prohibits a credit scoring model from considering any prohibited basis such as race, color, religion, national origin, sex, or marital status. Regulation B also stipulates that credit scoring models must be empirically derived and statistically sound. Furthermore, if an adverse action is taken as a result of the credit score then specific reasons for the denial must be provided to the individual. A statement that the individual “failed to score high enough” is insufficient; the reasons must be specific.

There exist several generally accepted algorithms for extracting the primary contributing factors to a low credit score. One or more of these algorithms is typically used to supply a list of reasons when a loan applicant has been denied credit, in order to satisfy the Regulation B requirement that specific reasons are disclosed. Some consumers feel these adverse action reasons are somewhat disingenuous, as the only determining factor for credit denials is a numeric score — the “reasons” are summed up only for the consumer.

As mentioned above, each credit bureau also has one or more of its own generic credit scores, available both to consumers on their websites and to lenders. For ease of use, these scores tend to be mathematically scaled so that they fall in the same general range as the FICO score. These scores are used by some businesses to assess creditworthiness (otherwise they would not be offered), however the FICO score remains the dominant score in use today.

You can get your FICO score from various venders including GoFreeCredit available at: Free Annual Credit Report.