The average credit score is a numeric calculation used to decide who gets home loans at what interest rate. If this magic number is high enough, prospective home buyers get to move into their beautiful new home. These lucky buyers have low interest rates making home ownership less expensive. However, if this number is too low, the borrower buys a house with a higher interest rate or a we-are-story letter from the lender. By understanding how the three different credit reporting bureaus work, consumers use this information to increase their credit worthiness and save money.
What Do The 3 Credit Bureaus Use?
There are three credit reporting bureaus in the United States. These are Experian, Equifax and TransUnion. Information about consumers is relayed to one, two or all three of these statistic keeping businesses. This information includes:
• Mortgages
• Automobiles loans
• Credit cards
• Revolving credit like a Sears account
• Installment payments for furniture or appliances
• Collections
• Judgments
• Foreclosures
• Repossessions
• Government liens
Credit Bureaus Use Different Numeric Scores
Each credit bureau records incoming information and issues a numeric score based on the data collected. Although these scores are commonly called FICO, each bureau has its own format, range and name.
Credit Bureau Score Name Numeric Range
Experian FICO 330 to 830
Equifax Beacon 350 to 850
TransUnion Emperica 300 to 850
Credit Bureaus Use Different Information
Unfortunately, not all bureaus receive the same information on each borrower. Lenders, credit card companies and other credit issuers may only report consumers’ paying habits to one or two of these bureaus. This difference in information transmitted is one reason credit scores differ from agency to agency.
How Credit Scores Are Calculated
Each reporting agency uses the same formula to analyze consumers paying habits. These are:
• 35% payment history,
• 30% credit utilization or the amount of credit used compared to the amount of credit available
• 15% the age of credit, a credit card account that is 10 years old is worth more than a one year old credit card,
• 10% recent credit applications; these remain on the report for two years and
• 10% the mix of consumer credit with higher points combining mortgage, auto and credit card.
Each financial event in the consumer’s life has an impact on this credit score. On-time payments add points while late payments deduct points. How many points are added or subtracted is a closely guarded secret and one reason for discrepancies between companies. The other has to do with value systems.
Even a 30 day late payment on a FICO score of 680 can drop the score 60 to 80 points while bankruptcy lowers that score 130 to 150 points. A person with a higher FICO would be penalized even more for the same actions. A 30 day late payment may drop the score 90 to 120 points while a bankruptcy would cause this number to plummet 195 to 225 points.
Computing the Average Credit Score
Although many credit issuers only use a score from one company, others like banks and financial institutions get this information from all three credit reporting bureaus. Armed with this data, they either average the three numbers or take the middle amount. For example:
Customer TransScore EquifaxScore ExperianScore Average Middle
John 750 680 720 717 720
If the lender required a score of 720 to get the loan and averaged the three credit scores, John would not qualify. However, if the lender used the middle score which was 720, John would qualify for the loan.
National Average Credit Score
According to a recent report, the national average credit score in January 2011 was 692. People with scores 750 and above are rated excellent. People earning scores between 680 and 750 have a very good rating and qualify for home loans. However, some lenders require borrowers to have scores of at least 720. People with scores below 550 have trouble getting financing for almost anything.
Improving Your Score
There are two ways to improve credit: checking you free credit report once or more per year to make sure they contain only up-to-date and accurate information and handling finances wisely. Many times information on these reports is wrong. Problems include:
• missing accounts
• wrong information on existing accounts including payment status and balances
• paid off accounts are still active
• accounts belonging to someone else
• judgments, foreclosure, repossession or bankruptcy not the consumer’s
Consumers need to inspect all three reports and send a letter to the bureau showing incorrect data. Every individual is allowed one free credit report a year from each of these bureaus. Over time, anyone can improve his or her credit scores by doing the following:
• pay bills on time,
• keep credit card debt to 30% or less of the credit card limit,
• keep older credit card accounts active,
• refuse new credit and
• use different types of credit like automobile or other installment loans, home mortgages and credit card accounts.
These numeric calculations on financial responsibility are important. Whether someone arranging credit uses just one score from Equifax, Experian or TransUnion or collects scores from all of them, higher numbers are better. Most lenders use the average credit score of all three to decide the credit worthiness of the borrower. Although consumers do not have control over how their financial history is analyze and calculated, they can improve this all-important number by paying bills on time, reviewing their reports and handling credit wisely.
