What came first, the chicken or the egg? As I sat at my computer laughing about this question, seriously speaking, it’s one that has baffled scientists and academics alike for ages. But when it comes to credit, what came first; the credit score or the credit report?
One look at the T.V, one listen to the radio, or one browse through the internet and we are constantly being bombarded with jingles from companies like “freecreditscore.com”, or ads on how to “fix your credit score”, or seeing online “tips, tricks, and advice” on how to fix your credit score. So that settles it, right? The credit score came first. WRONG!
Let Me Explain
Let’s begin with the question; what is a credit score? According to the “learn about scores” section on myfico.com, you have three FICO scores; one for each of the three credit bureaus: Experian, TransUnion, and Equifax. Each score is based on information the credit bureau keeps on file about you. As this information changes, your credit scores tend to change as well.
Let’s break that statement down a bit. We have 3 FICO scores – check! (more on this later) Each score is based on information the credit bureaus keep on file about you – check! Wait a minute; my credit score is based on the information the credit reporting agencies, Experian, TransUnion, and Equifax have on file about me? Contained in my credit report? YES!
Information = Credit Score
Additionally, the same page at myfico.com states that for your three FICO scores to be calculated, each of your three credit reports must contain at least one account opened for at least six months. Each report must contain at least one account that has been updated in the past six months as this ensures there is enough information – and enough recent information – on which to base a FICO score on.
So if the credit score is based off the information that is contained in our credit report, wouldn’t that information be more important than the actual credit score itself? Bingo; of course it does! But that’s not where the revenue is generated from. It’s generated in getting you to buy that credit score and buy products and services that promise to “fix” or “monitor” that credit score. In fact, it costs the credit bureau’s money every time they have to address a dispute. In case you didn’t know, they are not “non-profit” organizations.
Time For A Shift In Mindset
When was the last time you heard a jingle about credit report correction? When was the last time you heard a commercial on how to correct your credit report? When was the last time you saw a Google Ad for correcting mistakes? What we get instead are catchy tunes and advertising about “fixing” our credit scores! I don’t know about you, but when I hear that song from “freecreditscore.com” it takes me hours before I can get it out of my head!
What I want you to do right now is take a deep breath because the next line you read is about to totally disrupt the thought process you have been “conditioned” to believe; there’s no such thing as “fixing” your credit score! You read that right! The only thing we can do as amateur consumers is “correct” the information contained within our credit report by making sure it’s accurate and complete!
Just to clarify; you can improve your credit score, which is inherently different than saying ‘fix’. The technical reason why you can improve your credit score is because the credit reporting companies apply an in-depth mathematical model (called an “algorithm”) to the information in your credit file to yield your credit score. As such, it will respond to improvement in the different factors used by the algorithm to determine your score. But again, that’s different than “fix” and I explain what these factors are in my free video series, The Better Credit Blueprint.
Only 3 Credit Scores? Kind of….
So FICO says there are 3 scores; one for each of the three credit bureaus, right? But in a recent article for The New York Times, Ann Carrns, a freelance writer based in Fayetteville AR wrote that we have 49 different FICO scores. Wait a minute; didn’t FICO say there were 3? Well – kind of. You see, in the same article, Ann had John Ulzheimer, a nationally recognized credit expert, share this infographic showing a total of 49 different versions of your credit score under the FICO umbrella. Oh…there’s a FICO umbrella? Why didn’t you just say so?
Of course, Ann asks, ” why so many?” Guess what; we all do! That is those of us who strive to understand credit and how to manage it in order to become a better, more informed consumer! But herein lays the problem. John points out that all of this can be confusing to, what I call, the “amateur” consumer.
Is My Credit Score Ready?
Ann writes that credit data is collected by the three major credit bureaus (Equifax, Experian and TransUnion) and analyzed by FICO to create a single, three-digit score. For further clarification I would add; at the time your credit is pulled. That’s right. Not only are there many differing scoring models, but they are scored at the time your credit report is being requested. It’s not just sitting there in some credit bureau’s computer.
For instance, you could be shopping for a car and have your credit report pulled from two different dealerships – 2 hours apart, and your scores could be different! How, you ask, if nothing has changed with your credit over those 2 hours? Welcome to the confusing and nonsensical world of credit scoring where we, as truly Amateur Consumers, really are clueless!
Clearly, The Report Comes First!
John goes on to say that the main point to keep in mind is that the same general principle applies to keeping your scores attractive to lenders: Pay your bills on time, maintain low credit-card balances and apply for credit only when you really need it, “not to save 10 percent at the mall”. That’s good solid advice and surely he doesn’t need my endorsement. However, I would argue that the main part as consumers is to understand that credit report accuracy is first and foremost, a consumer protection issue, and you have to make sure the information contained in your credit file is 100% accurate. Then you can worry about actually improving it.
The fact is we place too much importance on credit scores and not enough importance to the actual information contained in our credit report! Sufficed to say, if your credit score is determined by the information contained in your credit report, before you do anything, you should make sure that information being reported about you is correct. After all, the best guardian of your economic reputation is you!