5/23/2011 11:30 AM ET|
The gods who rule your credit scores
These 3 big companies control your financial future. Understanding how they work will help you better manage your credit rating.
These days, consumers generally rely on Experian, Equifax and TransUnion to compile their credit, but it used to be that there were more than just three dominant credit bureaus sharing their information with lenders.
Credit bureaus themselves began popping up in the late 1800s when local merchants, looking to determine whether a loan was likely to be paid back in a timely fashion, started sharing information with one another about borrowers in their region.
Equifax, for instance, was founded back in 1899 by brothers Cator and Guy Woolford, after Cator -- a partner with a Chattanooga, Tenn., grocery store -- was tasked with compiling a list of credit customers' paying habits for the local retail grocers association.
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Over time, the Woolfords and those who had started up similar services started sharing and ultimately selling the compiled information in other cities, Maxine Sweet, an Experian spokeswoman, explained. Information was pooled, technology was developed and the big fish started eating the little fish until we ultimately ended up with the reporting system that we have today -- which, it should be noted, extends beyond the three credit bureaus that consumers may be most familiar with.
"There are still some other bureaus and affiliates out there," John Ulzheimer, the president of consumer education for SmartCredit.com, pointed out. This includes CSC Services, which operates its own credit services division but also services Equifax customers in the Midwest, and Innovis Data Solutions, which was also affiliated with Equifax until it branched out on its own.
Still, the nature of the business and the ever-increasing amount and complexity of information about people's financial habits have kept the number of credit bureaus limited to the current big players.
"Their model is very hard to replicate because, unless you buy one of them, it takes years to build a credit report database," Ulzheimer explained. "And no lender will purchase a credit report from a new credit reporting agency if their data isn't sufficient to make a good lending decision."
More than one score
Experts point out that the real misconceptions about credit reporting (and the problems that result) have less to do with the number of bureaus in operation and more to do with the number of different scores that are available to both lenders and consumers.
While most consumers generally believe there is one standard scoring system -- the common 300 to 850 FICO credit-scoring model -- "there are a number of different scores available for use," pointed out Demitra Wilson, an Equifax spokeswoman.
The assumption of the FICO standard is particularly problematic, since, unless specified, the scores that consumers buy from the credit bureaus aren't even technically their FICO score. In most cases, what they are seeing instead is a score generated by a formula that the bureau itself bought from FICO (based on consumer data supplied by each company) that allows it to assign different weights to different financial scenarios.
"We provide the analytics," Barry Paperno, a manager of consumer operations for MyFICO.com, explained. "FICO doesn't actually calculate the score."
FICO is also not the only company that sells a quantitative way to calculate qualitative information. In fact, Sweet points out, pulling your score from Experian and TransUnion through the government-sponsored AnnualCreditReport.com will actually get you a copy of your Vantage Score, a competitive credit-scoring model that uses the numerical range of 501 to 990, with higher scores representing a lower likelihood of risk. (Equifax provides its version of the FICO score, the Equifax Credit Score.)
To further complicate things, some bureaus and other third-party credit resellers market an entirely different set of credit scores and reports to lenders like your local bank or auto dealership.
What a lender looks at
Equifax's Wilson explained that some lenders actually purchase customized scoring systems that will net them a better idea of a borrower's creditworthiness within their particular industry. Equifax, for instance, markets a specific BEACON score to auto dealers and auto finance companies that is designed not to calculate a consumer's creditworthiness in general but to look at whether the person is likely to repay a car loan.
Other scoring systems can be obtained through credit resellers who pay the credit bureaus for their data and then repackage it to meet a lender's needs. Wilson likens these credit resellers to boutique owners who keep branded merchandise from big-name clothing manufacturers on their shelves. "The boutique doesn't make Seven jeans, but they do have them on sale," she explained.
Whatever recourse a lender chooses to determine a borrower's creditworthiness, the takeaway remains the same. The score (or sometimes an average of multiple scores) that the lender is looking at will likely vary from the one that consumer has access to.
"There'll be different codes underneath the score," Chad Smith, the senior vice president of mortgage services for Lending Tree, said when he explained to MainStreet the process his company uses to check a borrower's credit. "There will also be commentary on what's driving it."
What does it all mean?
So does this tangled web of proprietary information, and the formulas used to evaluate it, suggest that pulling your credit score is pretty pointless? Surprisingly, not at all.
Smith explained that lenders aren't looking just at a borrower's credit score, no matter which particular one they use. They're looking at the balances on open lines of credit, a consumer's overall debt ratio and the person's credit history, particularly within their industry. This is basic information that also appears on a consumer's credit report, no matter which formula is being used to calculate the accompanying score.
"The score is meant to be directional," Equifax's Wilson said, explaining that whether you're looking at a FICO score, Vantage Score or a credit bureau's own unique version of either, the point should be to identify the same red flags a lender may spot and take corrective action to eliminate them before you apply for a loan.
"The idea is not to focus on the score but instead on what you can do to improve it," Sweet said. She explained that any credit report will highlight at least five factors driving the score up or down, which essentially provides a road map for how you can increase your credit profile. She said consumers should also put more emphasis on the risk rating they are issued on their credit report, since "that's consistent no matter what number you use."
In other words, if a report says you are low-risk, a lender is likely to lend to you. If it puts you in the highest-risk group, you're probably out of luck and should take serious steps to remedy the situation.
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In fact, the only way your risk range won't be consistent across the three main credit agencies is if different information is appearing on each one's version of your credit report. This can happen, because the credit bureaus get their data from separate sources and one particular lender may not report to all three.
Big discrepancies, SmartCredit.com's Ulzheimer pointed out, will be few and far between since, by now, most major lenders are in the habit of reporting to Experian, Equifax and TransUnion -- which is how this whole investigation got started in the first place -- but there is a chance that false information might appear on one rather than the other. This is why it is commonly suggested that consumers pull their credit report (and whatever score they prefer to pay for) from each of the three credit bureaus at least once a year, a service that any of the big three bureaus is happy to provide to you directly.
"They're in competition with one another, but they partner together as well," Ulzheimer said.
This article was reported by Jeanine Skowronski for MainStreet.
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I have been monitoring my credit for a few years now. I have found that there is little consistency, regarding the way in which credit scores are calculated amongst FICO, Experian, TransUnion and Equifax. I also came to find the commercial credit scores are not the same as consumer credit scores. So what a consumer sees and pays for as they montior their credit, may be completely off balance compared to what companies and other agencies will see when they pull your credit report.
There shows to be very little accountabilty of these credit reporting agencies. They do need to abide by more strict rules and polices and they need to establish consistency amongst one another. They are a joke at this time and should not in any way, be a representation of an individuals character,...I could go on...but it is most like a moot point.
It would be nice to have access to your actual score and the credit reports ANYTIME you WANT OR NEED! Not just once a year, maybe. Usually Exquifax doesn't respond or takes a few weeks to get your report to you.
If credit lenders and the scamming crooks who steal identities can have access to my 3 digit credit score WHY DON'T I?
Another Company misspelled my name on a loan I took out. Now I have an Alias on my report. Going on 10years and still can't get it off.
I believe sense they have so much control over a persons life, for every mistake they make they should be fined. Maybe than they would be more careful and reports more accurate.
TELL THE PEOPLE THE TRUTH! The credit scoring system is a rip! Almost no one knows what "FICO' stands for. It is a "For Profit" company, that has nothing at all to do with the goverment. It is actually the initials for the two founders of the company "Bill Fair" and "Earl Isaac" Fair Isaac Company. There is nothing "fair about this company. If it were any other company, they would call it a monopoly. They are the only game in town All americans are affected by there credit score. Higher interest rates, higher insurance etc. This company makes its profits from the banks. The banks who charge the higher rates for people with lower credit scores also pay FICO for there services. One of there biggest accounts is BANK OF AMERICA, which coincidentally is one of the biggest banks in the US, which also has the highest fees of any bank, and which has a substantial amount invested in Pay Day Loan companies.
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