How does your credit score get calculated? Why do you have different scores in different places? Understanding what goes on your credit report and what impacts your credit score is one thing. But who takes these factors and compiles them into your credit report?
The answer lies in credit bureaus or credit reporting agencies.
Who Are Credit Reporting Agencies?
A credit bureau is a company that gathers data related to your credit and shares it with other companies, such as your bank or individuals like yourself. There are three main credit bureaus: Experian, TransUnion, and Equifax.
How is Your Credit Report Created?
Credit agencies compile your credit report based on a variety of factors including:
- Your lending history with other credit card companies and banks
- Your bank accounts and their balances
- Your debt repayment history
- Your current credit limits
- Outstanding debts from collection agencies
- Public records
Why Is My Score Different Across Credit Bureaus?
If you’ve checked any of these agencies or had a credit report pulled when trying to buy a car or rent an apartment, you might have noticed variations in your credit score depending on which bureau the inquiry was for. Each company gathers data individually and can even weigh factors differently. Your score doesn’t get updated simultaneously across bureaus, leading to discrepancies. Companies that report credit information may also not do so to all three agencies.
How Do They Get Their Information?
Credit bureaus use two scoring models to calculate your credit score. These models attach different percentages to various credit factors, resulting in your final score. They also obtain information about bankruptcy filings. The two scoring models used are FICO and VantageScore.
FICO
FICO is the most used model and has 5 key factors to determine your credit score, according to their website:
- Payment history – Making on-time payments accounts for 35% of your score.
- Amount owed – The total amount of your debts compared to your available credit limits is worth 30%.
- Credit history – The average age of your oldest and newest accounts is 15% of your credit score.
- Mix of credit – Having various types of loans, such as mortgages, car loans, or even student loans, will have a 10% impact on your credit score.
- New accounts – Any new account you open will impact your credit score by 10% due to the lack of history on the account and the hard inquiries that can come with opening new lines of credit.
VantageScore
This scoring model uses different percentages and variations on the FICO factors to calculate your credit score. These percentages are pulled directly from the VantageScore website:
- Payment history – An up-to-date payment history will significantly impact your credit score by 40%.
- Types of credit and account age – The variety of accounts on your report and how long they have been open will account for 21% of your credit score.
- Credit utilization – How much of your credit is used compared to your total limits accounts for 20% of your credit score.
- Credit balances – This is how much of your total limit is used on each account, like a credit card. It’s a lower factor at only 11%.
- Recent credit changes – Any new updates to your credit report will account for 5% of your score.
- Available credit – Your total amount of credit is worth 3% of your credit score.
What Are Credit Reports Used For?
Now that you understand how your credit score is calculated, you might wonder what your credit report is used for.
Many lenders check your credit report for a variety of reasons. Some of the most common include:
- Applying for a mortgage or lease
- Purchasing a car
- Applying for a loan
- Opening a credit card
Lenders check your credit report because they need to assess whether or not you qualify for their loan. This helps the lender comply with financial regulations, prevent fraud, and manage risk. Based on the risk you present the lender determines your line of credit’s interest rate and/or credit limits.
What Doesn’t Go on Your Credit Report
Of course, not all your information ends up on your credit report. Things like demographic information, medical history, and criminal records are not included. Financial information such as salary or investments is also excluded.
Some monthly bills don’t get reported either. Your utility and cell phone bills, streaming service payments, and other subscriptions do not affect your credit score. However, some programs can get these reported to the credit bureaus if you want to boost a bad credit score.
The Fair Credit Reporting Act
The Fair Credit Reporting Act (FCRA) regulates the credit bureaus. This law ensures the information collected isn’t used maliciously. It restricts how credit reporting agencies use and access your data.
The FCRA also offers many benefits for consumers:
- You can access your information and learn what goes on in your credit report.
- You also have the right to a free copy of your credit report every week from sites like Annual Credit Report or through services like Credit Karma.
- If your information was used to deny your credit application, you have the right to be told it was used against you.
- Sometimes, your credit report may contain mistakes or incorrect information, and you have the right to dispute any errors that could lower your score.
- This law restricts other people’s access to your credit information. Only those with “permissible purpose” may inquire into your credit report for the purpose of approvals.
- You may opt out of prescreened credit offers.
- This law allows you to freeze your credit so that no one, including lenders, can access it without your permission.
Balance Credit Does Not Use Hard Inquiries
When you apply for a personal loan from us, you don’t have to worry about it affecting your credit score. We don’t perform hard inquiries, so your application will not appear on your credit report. You can apply online without worrying about a negative credit impact.
Check out our FAQs to learn more or contact Balance Credit today!
*The information contained in this post is for general educational and informational purposes only. It is not an offer of credit, does not fully describe the products that we offer or facilitate, and it is not specific to any individual. These products are an expensive form of credit, and you should ensure that they meet your unique financial needs. We are not a credit repair organization and make no representation that we or any loan will improve or attempt to improve your credit rating. We do not provide financial advice or assistance regarding your credit situation. These educational posts are not a substitute for individualized professional advice.
