Why do the 3 credit bureaus have different credit scores?
Credit bureaus are companies that collect and store information regarding a person’s financial history. This information is then used to create credit reports that are then used to come up with an individual’s credit scores. Equifax, Experian and Transunion are the three main credit bureaus, also known as credit reporting agencies. These consumer credit bureaus are usually classified as a group. They are however competing companies that sell credit reports to creditors to help them make lending decisions.
Apart from the 3 credit bureaus, there are several other credit bureaus available. When lenders and creditors request for your credit report, chances are that they are checking your credit with either one or all the three agencies. The three credit reporting agencies are not government owned. The government, however, has rules that regulate their operation.
‘Breaking down’ credit bureaus
Consumer credit information is normally sent to the 3 credit bureaus by financing companies, banks, retailers and landlords. Based on the information, the credit bureaus come up with a credit report. It is from these report that credit scores are derived. Contrary to credit ratings which are issued in form of letters, credit scores are three-digit numbers that have an impact on the type of credit, the loan amount and the interest rate you qualify for. To some extent, the scores also affect a consumer’s employment opportunity.
What are credit rating agencies?
You may be wondering if there is a difference between credit bureaus and credit rating agencies. Considering that credit bureaus are also referred to as credit reporting agencies, the terms can be confusing. The main difference here is that credit rating agencies deal with creditworthiness of corporates for investors to know the financial position of companies they want to invest in. Unlike credit scores that come in three-digit numbers, credit ratings and usually inform of letters.
What do the 3 major credit bureaus do?
As stated earlier, there are many different credit bureaus in the United States. But the most significant ones are Equifax, Experian and TransUnion. These three credit bureaus dominate the market when it comes to collecting, analyzing and distributing consumer credit information. The three agencies collect the same type of consumer information from lenders and other financial institutions including personal information like name, address, date of birth and the social security number. Other information includes the consumer’s credit history, which consists of consumer’s payment history, debt and new credit applications.
The firms use this information to come up with different credit report information, which is later used to determine your credit score. Consumers can get their FICO scores from the 3 credit bureaus. However, the bureaus use different methods of calculation. For instance, Experian uses Experian/FICO risk model v2. TransUnion credit score is known as VantageScore which is also the main competitor to the FICO system. Equifax credit report ranges from 280 to 850. But even with different systems used, the ultimate result is an individual credit score. FICO scores may also vary from one credit bureau to another depending on the method of calculation and the gathered information.
What you need to know about the three main credit bureaus
Credit bureaus use your financial information to come up with your credit report. This report is later used to calculate your credit score. Credit reports are used by lenders and creditors, including credit card companies when considering whether to issue credit. The three bureaus provide consumers with a free annual credit report. The data used by the bureaus to come up with your credit report is collected from different sources. These include;
- Information from creditors
Creditors, including credit card issuers and financial institutions may report a customer’s financial information to credit bureaus. The creditors, in this case, can be termed as ‘data furnishers’.
- Information bought by credit bureaus
At times, data can be bought by the credit bureaus. This can be the consumer’s public records information like bankruptcy records and government tax liens.
- Information shared among credit bureaus
As much as the three credit bureaus are competing businesses, they in some cases, must share consumer information with each other. If for instance, one of the bureaus receives a fraud alert, it is a requirement that such information should be forwarded to the other two.
Why do the 3 credit bureaus issue varying credit scores and reports?
If you take a closer look at your credit reports, you will realize that they have varying information. For instance, TransUnion credit reports may not be the same as a credit report from Experian. One of the reasons behind this is that creditors may report your information to only one or two credit bureaus. Others may not report the information at all. Depending on your credit report, you may also notice differences in your scores. This is due to the different data used to come up with credit reports.
How to dispute inaccurate credit report information
In some cases, consumer credit bureaus may not have enough information to come up with a credit report. But if they have, the credit report information is usually given for free on a yearly basis. If you notice any inaccurate information in your credit reports, then you have the right to file a dispute. Under the Fair Credit Reporting Act, both the company that gives information to credit bureaus and the consumer reporting companies must thoroughly investigate the information and ensure that every detail is correct before publishing your credit report. You can dispute this information by email or over the phone.
Do you have to use all the three credit scores?
Since credit agencies may not receive the same information regarding your financial behavior, it is important that you compare copies of your credit reports and scores. Some lenders may only report your information to either one or two credit bureaus, which means that some items may be included in on report but missing in another. Such variations can have a major impact on your credit scores. When a lender requests for your credit score, it is usually calculated based on the credit report available with a specific credit reporting company. While you may have a higher score in one report, another report may reduce the score. If you are denied a loan based on a poor credit score from one of the bureaus, you can ask your creditor to consider a better score from another bureau, but you also have to justify why the first credit score wasn’t attractive.
There are many credit agencies that use varying information to come up with credit reports from which scores are drawn. Since these reports do not contain the same information, you can still file a dispute if you notice any errors in your credit report. You actually can’t control which report your lender should use, but regardless of the credit report, higher scores are always better. The actual numbers on your credit score may be different, but if you have a good score with one bureau, there are higher chances that you have good scores with other bureaus too.