Want to know the #1 secret of Credit Bureaus?

Credit Bureaus Are in Business to Make Money.

Every one of the major credit reporting agencies or credit bureaus; TransUnion, Experian and Equifax, are independent businesses. They are, at their core, the largest list broker services in the nation; which means that they sell consumer information, and not just in the case of credit reports. They sell qualified lists. They’re the largest list brokers in the nation.

Isn’t it amazing that you can call up any one of the 3 credit bureaus and request that documentation? They will sell you that information that qualified list. And nobody whose name is on that list needs to be asked if it’s okay with them, because that’s the business that they’re really in.

A credit report is nothing more than taking the same information they already have on all of us and putting it into a package that we call a credit report, and then selling it.

Here’s another secret:

Credit Bureaus Are in Business to Make Even MORE Money.

Another way credit bureaus make money and one that most people don’t realize is, they get paid by the creditors. The creditors actually pay to report information.

Not only does it cost them money to compile it, but they also have to purchase the software system that integrates with the credit scoring companies or the credit bureaus themselves, TransUnion, Experian and Equifax, they have to pay for that and they have to pay to report every line that they report on consumers.

Credit scores have long been determined by a nearly universal formula known as the FICO^{® *} model. This model, owned by Fair Isaac, is used by over 80% of the major banks in the US, and is the familiar 300-850 credit ranking that consumers are familiar with.

The credit bureaus have put out their own credit scoring formula to rival the FICO^{® *} formula. This newer method of scoring is known as VantageScore, and is said by the credit bureaus to be a better assessment of risk, and just as good as the FICO^{® *} system at stabilizing differing data from the three credit bureaus.

There are two ways in which the bureaus believe that their method is a better risk assessment than the FICO^{® *} one. VantageScore takes a different approach to some borrowers that the bureaus feel pose more of a risk than the FICO^{® *} model accounts for. These are newer or “younger” borrowers, those with their oldest account open for several months to a year or two, and “lean” borrowers, who have few accounts to gather information from. The bureaus have long complained to Fair Isaac that these borrowers’ habits have not been well established enough to warrant even the best of them receiving a top credit score. They claim that their model does a better job assessing the risk of young and lean borrowers. What this may translate to in practice is credit becoming significantly less accessible to these consumers.

The second way in which the bureaus believe VantageScore better assesses risk is in separating good from bad risk. VantageScore has even advertised the importance it places on putting more bad risk accounts, or even possible bad risk accounts, into the very lowest score ranges possible. What this may mean in practice is less concern about a contested mark on an individual’s credit report or less tolerance overall of minor infractions, and more individuals being placed into the “bad egg” category, perhaps somewhat hastily. This will remain to be seen once the system has been in place for a measurable amount of time.

Perhaps the true test of the new system’s effectiveness will be in its ability to give consistent scores to borrowers regardless of which credit reporting bureau is providing the information. The three credit bureaus, Equifax, TransUnion, and Experian, all accumulate their information independent of one another. There may be accounts that show up on two of the bureau’s reports on the same individual, and not on the third company’s. There may be a contested charge that two companies agree to remove, while the third refuses. There are different policies and networks in place that acquire the information of consumers. Thus, the challenge and success of FICO^{® *} has been in their ability to provide a relatively stable credit rating for consumers regardless of which set of information they are getting; to weed through the discrepancies, essentially. If VantageScore is able to do this, it will have a greater chance of being accepted by lenders. The bureaus claim that it does just that, but as of yet, it has not been tested against FICO^{® *} or in any significant way. This will likely be the test of whether or not VantageScore has the staying power to give FICO^{® *} a run for its money and be a permanent fixture on the credit scene.

* FICO, myFICO, and 300-850 score are trademarks and/or registered trademarks of Fair Isaac Corporation.

The main system in place for determining credit scores is called FICO^{® *}, an acronym for Fair Isaac Credit Organization, which is the company that owns this formula.

The three credit bureaus, Equifax, TransUnion, and Experian all use this system to establish credit scores, but they each market it under a different name. Equifax markets their product as Pinnacle; Experian as the FICO^{® *} Advance Risk Score; and TransUnion as Precision. It is important to be aware of these names, and to note that all of these products employ the same formula for establishing credit score.

The notable differences in the different products marketed are due to slightly differing data that each of these bureaus collects on any given individual or business’s borrowing habits. These bureaus are competitors, and work independently of one another. Certain aspects of one consumer’s credit history may not be reported to all three, and thus may be missing from one or more bureau’s data. Likewise, contested aspects of a credit history may not be removed as requested from all of the bureaus.

This is the largest reason for differing information from each bureau. Additionally, many consumers do not take an active approach to managing their credit score. The unfortunate result of this is that incorrect information is not at all uncommon on credit reports. It is essential for any fiscally successful individual or business to be aware of the information being reported on their credit reports for this very reason. Again, even in the case of incorrect or disputed items, it is not always the case that all three bureaus will remove the discrepancy.

When discussing variances in credit scoring, it is also important to note that scores may differ depending on the reason for which they are being generated. A report generated for a mortgage may be slightly different than one for a car loan, etc. This is because these different elements of the finance industry have different standards and requirements for lending money.

Another important distinction to make when looking at your FICO^{® *} credit report is the difference between credit score and credit rating. These terms are not synonymous as most consumers believe. The credit rating is a letter grade assigned from A to D, with + and connotations in between. It is based on a number of factors, one of which is the credit score, but other factors include your current financial situation and your history of debt management and payment and other borrowing practices.

The credit score, however, is based on five factors that have very specific weight in their importance. The most heavily weighed of these factors is payment history. This is considered to be the most significant indicator of an individual’s risk. FICO^{® *} assigns 35 percent weight to this element. The second most heavily weighted item is outstanding debt. This is considered to be the most significant indicator of your current fiscal health, and is assigned 30 percent weight.

The other factors in descending order of importance are the ‘age’ of your credit history (how long you have been establishing credit), types of credit currently issued to you, and the amount of recently opened or established credit.

Being aware of these different terms and variances in your credit report are essential to a fiscally fit individual or business.

* FICO, myFICO, and 300-850 score are trademarks and/or registered trademarks of Fair Isaac Corporation.