About Credit Reports & Scores

If you do not know how credit reports and scores work you are not alone. Most Americans do not understand the credit scoring system, according to a Frontline report from the Public Broadcasting Service. Your credit rating can determine whether you get a mortgage and possibly even a job, so it is helpful to understand how it works. The first step to maintaining or building good credit is to obtain a copy of your report.

What is a Credit Report and Score?

Credit reports are a collection of data reported by your lenders. The credit rating agencies, however, do not own the scoring system preferred by many lenders: the FICO model. The FICO credit score formula is not made public, so you cannot pinpoint the exact effect of any specific financial activity on your score. The three-digit score, which ranges from 300 to 850, rates how likely you are to default on a loan. For example, according to the Carreon and Associates website, the odds are 2.25-to-1 that a consumer with a score of 585 will miss a payment.

What is Reported?

Technically, the credit agencies can report any account as long as the creditor making the report subscribes to the reporting service. But the subscription is too expensive for small-time providers, such as apartment complex landlords. Utilities companies report to the bureaus in some states, but most states do not allow them to share private customer data. Also, creditors are not obliged to report to all three major bureaus, so you should ask lenders which bureaus they report to.

Misconception

The Fair and Accurate Credit Transactions Act (FACTA) requires the credit reporting agencies to allow everyone to obtain a copy of his credit reports once a year for free. As of 2011, AnnualCreditReport.com is the only website that can provide you with a free annual report. Your credit report, however, does not include the FICO score. You might see offers for a free credit score, but it typically comes with a catch, such as requiring you to try out one of the agency's other services.

Tip

Three agencies -- Equifax, Experian and TransUnion -- perform most of the consumer credit reporting in the U.S. They have licensing agreements with the Fair Isaac Corporation (FICO) to develop proprietary scoring models based on the FICO standard. Equifax calls its score a Beacon, Experian has a Experian/Fair Isaac Risk Model score and TransUnion has the Empirica. In 2006, to try to win business from FICO, the three major credit reporting agencies introduced VantageScore. The agencies also sell "educational" scores based on models they developed themselves.