Warning: Your Credit Score Range May Be Flawed

What is a good credit score?

If you’ve ever checked your credit report, you might have noticed that Equifax, TransUnion, and Experian scored your credit history differently.  How could you have 3 different credit scores?  If you thought perhaps the different agencies use different math, you thought wrong.

In a recent article on wisebread.com, Miranda Marquit explains how all three credit bureaus use the same FICO algorithm to calculate your score.

You only have one true credit history. So if the bureaus are using the same math, how do they get different results?  The answer is simple, but alarming.  It’s because they each have a different version of your credit history on record. And that means at least one of the reports contains errors or omissions.

More on FICO and your credit report

FICO stands for Fair, Isaac and Company, a data analytics company known for credit scoring services, but generally provides data analysis software to help businesses make better decisions. The company’s FICO score is a trusted algorithm used by credit agencies to determine a person’s credit risk.

FICO scores range between 300 and 850 and according to Investopedia, scores above 650 indicate good credit history, while scores below 620 suggest credit issues that could result in higher interest rates due to the greater credit risk.

How do credit bureaus get their information?

As mentioned above, the credit bureaus calculate your credit score by running your credit history through the FICO algorithm. But how do they get your information to begin with?

According to Equifax, the information found in your credit report comes from the credit card companies, banks, and other creditors you have used. They report your credit activity directly to the reporting agencies.

How do mistakes occur?

Myfico.com lists the most frequent causes of errors on credit reports.  They include:

  • The person applied for credit under different names (Bob vs Robert)
  • Clerical error in keying handwritten information into a computer
  • Inaccurate Social Security number
  • Payments were applied to the wrong account.

Other inaccuracies on a credit report could be omitted information.  For instance, if a debt was transferred to a collection agency and you eventually paid off the debt, it is possible the debt could appear to be unpaid on the credit report.

Identity theft

It’s possible for an error on your credit report to result from something far more sinister.  Identity thieves can wreak havoc on your finances and credit history.

According to an article on Credit.com, by opening new accounts in your name, running up your debt, and not making payments, an identity thief could cause a 100 point drop in your score.  Although they point out that there should be no long term negative impact, it is still a problem that can take months to correct.

But before you can correct an error, you need to know there is one.

Credit monitoring

Because of the possibility of errors on your credit report, it is important for you to know what versions of your credit history are on record with the credit bureaus. This is especially true if you are considering taking out a new loan.

While obtaining a credit report is not always free, you do have several options.

By law, you are entitled to one free credit report from each of the 3 credit reporting companies every 12 months.  You can obtain yours at AnnualCreditReport.com.

If you’d prefer to be even more proactive in monitoring your credit, there are many different paid credit monitoring services you can consider.  NextAdvisor.com has an excellent resource to help you compare the costs and details of all the top service providers.  You’ll find most offer a free trial period.

What you can do to dispute errors

If you find errors on your credit report, your first step should be to report the error to the credit reporting company.  The Federal Trade Commission offers a helpful sample dispute letter and other helpful tips to dispute errors.

If the problems you discover on your credit report suggest identity theft, you’ll want to take a more aggressive approach to terminate the problem. US News posted a nine step action list you can reference if you discover your identity has been stolen.

Your credit history is your responsibility

It might seem a bit unfair that credit reports, which weigh so heavily in creditors’ calculations, could be flawed.  But at least you do have some control in weeding out the errors and filling in the omissions. In the end, make sure your one true credit history is the one they have on record.

Real Time Web Analytics