Financial experts often recommend regular
check-ups of your credit report as a gauge to see how well you’re managing your personal finances. The advice generally goes along these lines, “Request a regular copy of your report to monitor your credit history and correct any trouble spots before they become an issue.” It’s simple, right? Well, not exactly. With a variety of different financial scores and reports, including three major credit reports, a potential lender may be looking at one that shows a distorted picture, resulting in higher rates or being denied a credit application.
Since there is no way to know which report or score will be used by a potential lender, reviewing one isn’t enough to ensure a clear picture of your financial condition. Knowing and regularly reviewing several scores is the only way to protect your financial integrity, especially when you want to borrow money or use credit. Things may be accurate and look okay on one report, while another is full of errors or display problems that may be better understood, if explained. That is why you need to review the following scores.
Three Major Credit Reporting Agencies
More than 200 million credit files are being managed by each of the three major credit reporting bureaus, Experian, Equifax and TransUnion. Some consumers have too little credit history to generate a score; but the majority, referred to as ‘score-able’, contain sufficient criteria to calculate a credit score.
The three major players in risk assessments use the FICO scoring system and require a minimum criterion of one undisputed trade (credit) account that was opened more than six months old and has been updated within the past 6 months. Included in the calculations is a list of all credit accounts, both open and closed; how often you ask for credit; how much you owe and any judgments and liens against you.
FICO provides approximately sixty iterations of financial scores tailored to benefit businesses and institutions in other areas of finance such as collection scores, revenue scores, fraud scores, insurance risk scores, etc. The three major credit bureaus also assess risk by collectively developing risk scores, collection and recovery scores, insurance scores, bankruptcy scores and more.
New Kid on the Block – VantageScore
While you may not have heard of this fourth major financial score, it’s calculated by using the credit bureaus own scoring system (rather than FICO) and has become more widely accepted in recent years. Consumers who have at least one account remaining active in the previous two years may have a VantageScore. This score should be considered when monitoring your credit history and especially when it may come into play after you’ve applied for – or are considering – a new loan.
Other Financial Scores to Consider
Although the majority of requests for financial scores are provided by the three major credit reporting bureaus, some insurance and utility companies, banks and other lenders have come up with their own way of scoring. By building their own customized system, they have a clearer picture of the specifics required for their industry.
Which Ones to Watch
While it is impossible to say how many financial scores you have, keep in mind that the three major credit scores and the VantageScore are the most common and are the easiest to access. By requesting all four at the same time, you will begin to see a pattern of your actions reflected in them. By taking the average of all four, it will give you a reasonable prediction of what most lenders will see.
Just knowing that your finances are being viewed from a variety of avenues should make you more conscientious of how you handle your financial affairs. By law every consumer is entitled to a free annual credit report from the three major agencies at www.annualcreditreport.com. Credit scores must typically be purchased separately, but there are a few exceptions like CreditKarma.com.