How credit ratings agencies “score” you

By February 15, 2016 Blog

A credit report is a document that grades you on your ability to pay your bill. The credit ratings agencies that provide the reports — Experian, TransUnion, and Equifax — gather information from the credit card companies, mortgage lenders, department stores, utilities, and other firms that have provided credit to you in the past. The information they gather is aggregated into what’s called a FICO score, a number between 350 and 850 that reflects your creditworthiness.

People with lower FICO scores are considered less likely to pay their bills. Mortgage, credit card, telecommunications companies and even some utilities may reject their applications, or may charge higher rates and fees.

Among the population at large, relatively few have terrible credit card scores. The following table shows the distribution of FICO scores among people evaluated by one of the credit rating agencies, TransUnion. More than 50% have a FICO score above 700:

Transunion credit ratings agency

How to get a free credit report

Typically, when you apply for a new credit card or mortgage, or want to rent an apartment, the bank, lender, or landlord will run a credit report on you. They want to know if you are likely to pay on time and pay off any debt that you incur.

Wouldn’t it be great to see your credit report? It would allow you to understand your credit profile from the view of banks and other issuers, and identify any potential problems that need to be addressed.

Here’s some good news: You can see your credit report, and it’s free, thanks to federal law. Go to the government-operated website and look for the links that direct you to an external site that is the only official location to request reports from the three big agencies. Note that the free reports show many details about your credit history, but do not show your credit score — that is only available for a fee.

Once you get your report, check it carefully. If you see mistakes such as incorrect information about a dispute, unpaid accounts that you never opened, or other people (and their debt) being associated with you, there are processes for having this information removed.

Be on the lookout for situations that might indicate identity theft. You will need to resolve any case of fraud that is wrongly associated with your identity. Further, there are rights you have as a consumer — check out the website to learn more.

This post was excerpted from Personal Finance For Beginners In 30 Minutes, Vol. 1, by Ian Lamont. All rights reserved.