When creditors are deciding whether or not to issue a loan to an applicant, they check the person's credit scores from the most commonly used credit bureaus. There are three credit reporting agencies that are used nationwide. For credit scores, almost all lenders rely on the FICO score, but some have started using the VantageScore on an experimental basis.
The three major bureaus are Experian, Equifax and TransUnion. Equifax is the oldest, founded in 1899. TransUnion was founded in 1968, and Experian was founded in 1980. These three bureaus operate nationwide, and most smaller bureaus are affiliated with one of these three bureaus. Lenders usually order a credit score from all three of these bureaus because they usually have slightly different information.
Where Bureaus Get Information
Credit bureaus rely on a number of businesses to report your financial activities as well as public record. Any time you open an account, the company notifies the credit bureaus and then continues to notify them as long as the account is open. The company will report positive information, like on-time payments, as well as negative information, like delinquencies and defaults.
FICO Score and VantageScore Calculation
The most widely used credit score is the FICO score. The score was developed by the Fair Isaac Corporation, and the formula is not public knowledge. However, the factors that affect your FICO score have been released. Your FICO score is based 35 percent on your credit score, 30 percent on the balances on your accounts, 15 percent on the length of your credit history, 10 percent on your applications for new credit and 10 percent on the mix of credit you use. VantageScore is an alternative scoring system that was developed by the three credit bureaus. The score has not been adopted yet, but some lenders are using it on a test basis along with the FICO score. The VantageScore is based 32 percent on your payment history, 23 percent on the percentage of your available credit you are using, 15 percent on the amount of money you owe, 13 percent on how long you've had credit and the types of credit you've used, 10 percent on how much credit you have recently applied for and 7 percent on how much credit you have available.
The three credit bureaus offer credit monitoring services to individuals to protect against identity theft. These services give individuals access to check their credit report any time during the time they are enrolled in the service. It also provides alerts when new accounts are opened or suspicious activity is detected and also offers identity-theft insurance. TransUnion calls its service TrueCredit, Experian calls its service ProtectMyID, and Equifax calls its service ID Patrol.
The credit bureaus also provide services to businesses that are looking for new customers. These businesses need to know whether their potential customers, either individuals or other businesses, are creditworthy so they can determine the terms of their agreements. The credit bureaus provide information that helps businesses predict which companies are at a greater risk for being late with their payments or defaulting on the payments altogether.