Credit Reports & Credit Scores – Choosing the Best One for You

April 23, 2009

If you’ve ever applied for a loan, credit card, or mortgage, you know your credit score plays a major role in your approval. Having a good credit score is the key factor in buying a car or a house, or obtaining a credit card with a lower interest rate and better terms than those who have questionable credit.

So how do you know which agency and score is the best one for you? First, you have to understand the various types of credit scores that the three main credit reporting agencies use.

Credit Agencies & Credit Scores

There are three credit reporting agencies—Equifax, Experian, and TransUnion. Each credit agency keeps its own set of credit reports, so the information on each report varies. There are also many different credit score calculations available, but there are three main credit scores used by reporting agencies and lenders.

FICO

One of the most popular and comprehensive credit scores used by lenders is the FICO score. Created by the Fair Isaac Company in the 1950s, this credit score is calculated based on your payment history, your debt balances, the length of time you’ve had various types of credit, the variety of credit you have (credit cards, student loans, car loans, mortgages, etc.), and your ability to establish and manage new credit. FICO assigns a percentage to each of these credit factors and calculates a credit score ranging from 300 to 850. The higher your credit score, the better.

BEACON®

Equifax and Fair Isaac created a model where it assesses the account information provided in a credit report to determine the risk of the consumer accounts going delinquent in the next 24 months. The risk score assigned is referred to as the BEACON score. When a creditor requests your BEACON score, the risk is assessed at that point in time. It’s like taking a picture of your credit report and the BEACON score is based on the picture. This means that the BEACON score changes as your credit situation changes. Some lenders use the FICO and BEACON scores together to make a lending decision.

PLUS Score

Developed by Experian as a response to the need for consumers to better understand the importance of their credit score and what goes into calculating a credit score, this score uses a calculation formula similar to the one used by lenders. Experian collects credit data based on two million consumers in the U.S. Along with analytic resources it calculates a credit score that ranges from 330 to 830. Similar to a FICO score, the higher the score, the better.

Essentially, this score is similar to the FICO score, but it’s calculated by Experian rather than Fair Isaac.

Questions to Ask Your Lender

With three different credit agencies and a multitude of credit scores, how can you determine which agency and score is important to you? To come up with the right answer, you have to ask the right questions. When applying for credit with a lender, ask:

  • Which credit reporting agency (ies) do you use to pull a credit report?
  • Do you request one credit score or do you use more than one credit score?
  • Which credit score do you use to qualify me (FICO, BEACON, etc.)?

Ideally, you want all of your credit reports to reflect a good history and your credit scores to be high. By asking the right questions, you can determine which agency and score is important at the time you’re applying for credit.

Contributed by Kristie Lorette

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Ben

Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn’t like the other kids… His addiction to personal finance has paid off for his family and now he’s helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.


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Comments

5 Responses to Credit Reports & Credit Scores – Choosing the Best One for You

  • Keith

    What company would i use for a Canadian credit score?

  • Jeb

    There are three credit reporting agencies—Equifax, Experian, and TransUnion. Each credit agency keeps its own set of credit reports, so the information on each report varies. One of the most popular and comprehensive credit scores used by lenders is the FICO score. Created by the Fair Isaac Company in the 1950s, this credit score is calculated based on your payment history, your debt balances, the length of time you’ve had various types of credit, the variety of credit you have (credit cards, student loans, car loans, mortgages, etc.),

  • Mike

    Bottom line is that if you want to maximize your FICO score, you need to borrow money. I think it is ludicrous that you have to borrow money to get a score. One who doesn’t borrow money shouldn’t need a FICO score to rent an apartment or get a mortgage. But, banks have done an excellent job of convincing us that the score is required, meaning we must all go into debt to do something as simple as rent an apartment. Financial responsibility is discouraged, going into debt is.

  • RateNerd

    Keep in mind that when you have your credit pulled by a mortgage company, they use a different (slightly lower) score number than the FICO score you can get online. It creates confusion when folks think they have a 720 FICO and their lender tells them something lower. I never understood why a “mortgage FICO” was different, but it is.

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