Credit bureaus otherwise known as credit reporting agencies, calculate credit scores. But what exactly are they? How exactly are the scores calculated? Below are a few important facts and FAQ’s about the same.
What are credit bureaus?
These are private entities operated for profit. Their business is to collect consumer credit related information, collate the same in a report, and make the same available to the public in general. These entities also provide a computation of information based on their reports. This is called the credit score.
Are they part of the government?
No they are not. Credit bureaus are strictly privately owned. They do not exercise any governmental or quasi governmental functions.
How many credit bureaus are there?
It is almost impossible to know. Needless to say, there are many credit bureaus out there, each with their own report and score. The smaller reporting agencies are called micro bureaus, and are usually tied up to a specific lender.
What are the top credit bureaus?
There are three that come to mind. These are Equifax, Experian, TransUnion. Bear in mind that the word “top” is only indicative of their wide range, popularity, and ease of access. It does not mean that they are more accurate than other bureaus.
Who makes my credit score?
The popular misconception is that the credit bureaus make the credit score of a consumer. In reality it is actually the consumer that makes his/her score. It is only up to the credit bureaus to collect the information and calculate the same.
What is a FICO Score?
FICO stands for Fair Isaac Corporation. The same is regarded as the most accepted scoring model. This serves as the basis for most credit bureaus. The operative word is “basis”. This is because each credit bureau usually modifies the same. The modification of the model as well as the exact computation is based on the target market or audience of a specific credit bureau.
How do they calculate the scores?
The exact formula is unknown. This is because each credit bureau keeps it a secret. However it is accepted by most that there are 5 main categories for determining a credit score. These are:
- Amount of debt: The total amount of debt vis a vis the total net salary determines the positive or negative points that is assigned to a consumer.
- Credit utilization: Each consumer has a credit utilization limit. The common example of the same is the credit card limit. The nearer the consumer is on that limit, the lower the score. A good rule of thumb is not to exceed 30% of the credit utilization ratio.
- Types of credit: Creditors like to see different types of credit facility. This means that there are a lot of entities that like to deal with the consumer.
- Credit applied for: This is sometimes called credit inquiries. The more hard inquiries the lower the score.