I have written previously about how you can go to http://www.annualcreditreport.com and get a free copy of your credit report from each of 3 major credit reporting agencies once per year. This is valuable and something you should be doing to make sure there are no errors or unexpected items.
This service only provides free access to your credit report. If you want to actually see your credit score, you must pay extra for that.
So what is the difference between your credit report and your credit score?
Your credit report vs. your credit score.
Be aware that your credit score and your credit report are two different things. Your credit report is a list of all of your reported creditors. This would include credit cards, mortgages, auto and personal loans, etc. Note it only includes items that are reported to the credit reporting agencies. So, if you have a line of credit at the local mom and pop hardware, it won’t appear there unless they report it. You credit report will include a list of accounts, your payment history, your current balances and credit limits, whether the account is in good standing or is delinquent, and personal information about you and your employment status.
Your credit score on the other hand is a number that is calculated based on the information on your credit report. It is an attempt to look at how you have used credit in the past along with your track record for repaying that credit and distilling that down to a numeric score.
Not a single score
What many people don’t realize though is you don’t really have a credit score. You have many credit scores. First, there are three credit reporting agencies: Equifax, Experian, and TransUnion. You might expect to see the same score generated from each, but in reality each will be a little different. If your credit reports are accurate across the three sites then those scores should be close but they won’t be identical. If one of them is significantly different from the others, then that probably means you have errors on your credit report.
But wait, it doesn’t stop there. The Fair Isaac Corporation (FICO) creates the formula that is used to distill that credit report down into a specific number. They update that formula from time to time. That formula is also available to mortgage and credit providers. Many banks do their own calculation based off the FICO formula. So if you apply for a mortgage or other credit, your lender may not go back to one of those three credit reporting agencies, they may be calculating their own score and that score could vary depending on which version of the FICO algorithm they use.
In addition to that, credit scores are often used by insurance companies to evaluate what rate you will be charged for things like auto insurance. Guess what? They have their own algorithms for evaluating your score, so that number will be slightly different too.
The bottom line is you don’t have a credit score. You have credit scores. However, if the information in your credit report is accurate, all of those scores should be similar. If most of your scores are in the good range, but you have one that is way out of whack and indicating poor credit, then there is probably an error somewhere that you should try to get corrected.
My disdain for the Great FICO
While I think it is important to understand credit reports and credit scores and how they can affect your financial picture, in truth I really hate the credit score and what it has become in our society.
Everything about your credit score is related to how successful you have been at borrowing money and paying it back. All of the factors considered relate to debt.
If I were evaluating whether or not to loan you money, looking at your current debts and your past track record of making payments would be relevant information. But a history of getting into and out of debt isn’t really a sign that you are financially healthy. In fact, it is probably more of an indication of financial instability.
And yet our society has come to accept that a high FICO score indicates you are doing great. I think that is just plain wrong. But because of the way debt has been normalized and thus the importance that has been placed on a credit score, it is a factor that you must contend with as you navigate your financial world. As a result, knowing roughly your current credit score, and even more important, regularly reviewing your credit report are important parts of maintaining healthy finances. Just don’t make the mistake of borrowing money just so you can raise your credit score so you can later borrow more money.