How is credit measured?

how is credit measured

“Your credit is the key to getting more credit.”


Build it, protect it, fix it, and improve it for a financially healthy future.

Get a deeper sense of what constitute your credit. Understanding its nuts and bolts will only help you improve your chances of getting loans at lowest interest rates and with flexible terms.

No lender is likely to give you a loan without looking at your credit score, which is based on your credit report, a document containing details of your credit history over years. Read on to understand what these terms mean and how they are related to one another.

What is a credit history?

A credit history is a record of your financial behavior. It simply describes how responsible you are with the use of money. Your history looks specifically into the details of how responsible you have been with the repayment of debts.

If you have credit cards, taken loans or paid utility bills, you will have a credit history. On the other hand, you might not have a credit history at all if you have never borrowed money from a lending institution or paid any utility bills.

As a result, you must note the differences between a no credit history and a bad credit history. You need to build it up from the ground if you don’t have a history of borrowing, which you can do by obtaining a store credit card or secured credit card. Those with a bad credit history may have to work harder to turn the things round.

What is a credit report?

Your credit report is simply a document that offers a snapshot view of your credit history. A consumer credit report, thus, contains information about a borrower’s credit and bill payment history. The information is sourced from a number of places including the following.

  • Banks
  • Credit card companies
  • Retailers
  • Mortgage companies
  • Lenders that have granted you credit
  • Collection agencies
  • Various utility companies
  • Landlords
  • Credit unions
  • Public records

Among many other things, the information on your credit report may include the following.

  • The record of your payments on time (bill payment history, whether you paid the bills by the date they were due)
  • The amount of credit you currently have (or the number, age and types of active credit accounts)
  • The amount of credit available on you
  • The amount of credit you are using now (outstanding debt)
  • The information whether a debt or bill collecting agency is collecting on money you owe
  • The information about rental repayment for a property renter
  • Certain public records, such as liens, judgments and bankruptcies

The lenders need your credit report to

  • Decide if they can lend you money
  • Determine the rate of interest
  • Assess if you meet their terms and conditions

The three national credit reporting agencies that maintain a history of your credit activities are Equifax, Experian and TransUnion. You are entitled to receive one free credit report from each of these bureaus every year. You can either contact them by mail, phone or online to order their free copies of credit reports.

How to order credit reports?

You can order your free credit report online, by phone or by mail.


Visit the website

By phone

Call the toll-free number 877-322-8228.

By mail

Complete the annual credit report request form and send it to the following address

  • Annual Credit Report Request Service
  • O. Box 105281
  • Atlanta, GA 30348-5281

It is important to see all the three credit reports as the information might be slightly different from one report to another. This is because of the fact that not all creditors report their data to all three credit reporting bureaus. Some may choose to just report to one or two of the three agencies while others may report to none of them.

It is also important to check your credit reports at least once in a year as the information contained in them is updated regularly, sometimes daily, since your lenders and creditors keep on reporting the status of your accounts quite frequently.

How can I ensure that my credit report is free of errors?

Here are some steps to ensure that you credit report is accurate and up to date

  • Order your free copy of credit report from each of the three bureaus online through
  • Check if your personal information, such as your name and address, is correct
  • Verify that all your accounts are listed and you don’t see any account that you can’t recognize
  • Ensure that your payment history is correct for each account
  • Check the status of your accounts, verify activities on each of them, and ensure that the balances and account age are accurate
  • Ensure that all hard inquiries are for credit accounts that you have applied for
  • Double check to ensure that all negative information have been removed after the appropriate amount of time has elapsed

How can I fix errors on my credit report?

Your credit report may contain errors. Remember that you can always get the errors fixed for free by filing complaints online, by phone or by mail with one or all credit reporting agencies. As per the law, the bureau must investigate your complaint and inform you of the outcome within 30 to 45 days.

If you file your dispute by mail, you will receive the outcome by mail only. On the other hand, if you file your dispute online, you will receive email updates throughout the investigation.

Here are some of the tips that you might find useful.

  • After investigation, the disputed information will either be updated or deleted if found incorrect.
  • If the disputed information is found to be correct (through verification by your creditors), it will not be deleted from your credit report, but you have the option to add a statement of explanation, free of charge, to explain the nature of your dispute.
  • If you see an error in a report, you should match it with those in other two reports. If all of them contain the same mistake, you need to contact only one of them to get the errors fixed. The other two will eventually be corrected.
  • However, you can contact all the three reporting bureaus and even your creditor to hasten the process of error correction.
  • You are advised to get in the habit of regularly checking your credit report.

What are the instances of positive and negative information and how long do they stay

The following are some approximate time frames for how long different types of positive and negative information can remain on your credit report.


Timely payments10 years
Payments on credit cardsforever


Inquiries2 years
Late payments7 years
Delinquencies7 years
Judgments7 years
Paid tax liens7 years
Most public record items7 years
Unpaid tax liens10 years
Bankruptcies10 years

 Why are there three credit reporting agencies instead of one?

The primary reason is history. The evolution of these three credit reporting agencies occurred at different times in different parts of the nation when there was no computer automation. It is only recently that all the three have begun to report on people’s credit all over the 50 states.

Experian, then TRW, evolved in the west and is now based in Costa Mesa, California. TransUnion, based in Chicago, grew in the central United States (Midwest), and Equifax, in Atlanta, dominated the south and east.

Why can’t the three credit reporting agencies be merged into one as they seem to do the same thing?

Even if they are doing the same thing, their existence as separate companies is for the benefit of consumers. Many scholars are of the opinion that competition is better than a single-company monopoly because it fosters innovation in the products and services and promote lower costs and better customer service.

Though the purpose of their existence remains the same, they differ in the ways they handle credit reporting. Here are some examples.

  • Not all lenders report credit activity to each credit bureau.
  • Lenders that do report to these agencies may have their information compiled at different times, which will be reflected in the credit reports.
  • A lender may examine just one report from a single credit bureau to determine creditworthiness, which results in an inquiry appearing on one credit report and not on others.

What are the differences between the three credit reporting agencies?

The differences in credit reports may result because of the following.

  • Misreported or omitted data – this can be caused because of a number of reasons
    • You might have used different names (shortened version of your name or spelling differences) on different credit applications.
    • There might be an error representing your Social Security Number correctly at the three agencies.
    • Your payments could be applied to the wrong account, or someone else’s payments could be applied to yours.
  • A lender might have pulled the report from just one agency. That credit inquiry will show up in the credit report of that agency only. The other two will not be aware of the same.
  • A lender might not have reported a particular credit activity to all credit bureaus.
  • You are pulling your credit reports or scores at different times

Also there are differences in how these three agencies handle credit reporting. These may include the following.

  • Experian
    • Reports your on-time rent payments whereas the others only report negative rent data (these payments are only reported when your property management company reports Experian RentBureau. There is no way you can submit the same on your own.)
    • The above information is used in calculating Experian VantageScore and PLUS scores.
    • Experian also shows status details for each closed or transferred account, mentioning the month and year when the account will fall off the report. (it is usually 10 years)
  • Equifax
    • Open and closed accounts are listed separately (other reports show accounts alphabetically).
  • TransUnion
    • It has the best employment section. Though all reports mention the names of your employers, TransUnion goes a step further to list the company name, your position and date hired. Though this information doesn’t impact credit score, some lenders, especially a mortgage lender, might want to see if your employment history is consistent for the past two years.

What information is contained in all credit reports (Experian, Equifax, TransUnion)?

The informationmay include the following.

  • Personal information – full name, date of birth, address, place of employment, Social Security Number
  • Summary of Accounts – information provided by creditors about your payment history (mortgages, credit cards, auto loans, student loans, etc)
  • Public records – judgment, tax lien, bankruptcy – if judgments or bankruptcies are listed as dismissed, they will not impact your credit rating or score.
  • Inquiries – hard pull of your credit file by a lender that you apply (pulling your own credit report is soft pull and it doesn’t impact your credit rating).
  • Consumer statements – FCRA allows you to add a 100-word “Consumer Statement” to any of your credit reports if you have disputed an item in your credit files, but the item was not removed because it was verified by a creditor.

What is a credit score?

A credit score is nothing but a numerical value based on a credit report issued by a credit reporting agency, also known as a credit bureau. It enables a lender to quickly assess the creditworthiness of a borrower.

Credit scores are also called risk scores because they help lenders assess the risk associated with a lending product.

Out of the several credit scoring models, two are well known – FICO and VantageScore – and are used by most lenders in the United States. Currently, both range between 300 and 850, reflecting varying degrees of creditworthiness, from bad to excellent.

As per the Fair Credit Reporting Act (FCRA), you are allowed to get your credit score from each of the three credit reporting agencies, although at a reasonable fee. Consumers are often provided with information on how they can improve their credit scores.

FICO Credit Scores

The oldest as well as the most popular credit scoring model is FICO.

The purpose of a credit scoring model is to identify characteristics that relate to risk. To develop such a system, a random sample of customers is selected and analyzed statistically to identify risk factors.

A system must not use certain characteristics, as per the Equal Credit Opportunity Act (ECOA), such as race, sex, marital status, and religion, as factors. The law also requires a system to ensure equal treatment to applicants who are elderly though it may use “age” as a characterizing factor.

The information on your credit report is grouped into five categories, which become the basic building blocks of your credit score.

Here are the five categories in decreasing order of importance.

Payment History35%
Amounts Owed30%
Length of Credit History15%
New Credit10%
Credit Mix10%

Please note that the levels of importance are for people with general credit profiles only. The importance of levels for these categories may be different for different credit profiles.


VantageScore Solutions (founded in 2006) announced that nearly 1 billion of its scores were used and another 3 billion scores were requested by lenders for testing and modeling purposes in 2014. FICO still dominates the industry with 11 billion scores pulled in 2014. It’s used in 90 percent of all lending decisions, according to Fair Isaac, and by 90 of the 100 largest financial institutions.

Who uses VantageScore today?

Many of the nation’s top lenders, including national and regional banking institutions, credit unions, mortgage companies and credit card issuers, use the VantageScore model.

  • 7 of the top 10 Financial Institutions
  • 6 of the Top 10 Credit Card Issuers
  • 4 of the Top 10 Auto Lenders
  • 4 of the top 5 Mortgage Lenders
  • Experian has over 1,300 clients utilizing VantageScore

Free VantageScores 3.0 are available for free at the following

Creditsesame.comVantageScores from TransUnion
MyBankRate and QuizzleVantageScores from Equifax
CreditKarma.comVantageScores from TransUnion and Equifax
Credit.comVantageScores from Experian

What are good and bad credit scores?

Opinions vary across industries, so what is good at a particular lender might not be good enough at another lender. In general, anything above 700 is considered good on a FICO scale ranging from 300 to 850.

Based on the scores, the credit profiles can be categorized as follows

Best720-850the best rates everywhere you apply
Good680-719approval with good rates
Fair640-679approval with high interest rates
Bad300-639difficult to get approved

Which score does a lender use?

FICO scores are most widely used by lenders. There are about 50 different credit scores alone at FICO. VantageScores also offer a variety of credit scores. Besides, each credit reporting agencies have their own credit scores as well as a FICO score based on the reports they generate.

The most used version of FICO scores is FICO 8, which is available for $19.95 at Though free FICO scores are rare but they may be available with some credit card issuers – Discover, Barclaycard and Chase.

Some points to be noted here.

  • Lenders are usually provided with a different credit score than what a consumer can see. The reasons may include the following.
    • Lenders can pull FICO scores from any or all three of the bureaus. They usually get their tri-bureau report from a third-party provider.
    • Consumers are provided with scores calculated using the latest FICO formula while lenders are free to pull scores calculated using previous formulas.
    • FICO has many proprietary scores tailored to industries like mortgage or auto. You are never sure whether your lender will use a general score or a proprietary score.
  • Lenders see all the three credit scores (FICO scores from Experian, Equifax and TransUnion) and actually use the middle of the three (mid score not the median). If two scores are same, that will be the score that your lender will use.
  • If there are two borrowers (co-borrowers; husband and wife), the lender will use the lower of the two mid scores.

Never forget to order your free credit reports from all the three agencies. Ideally, you should pull from one agency every four months.

Things you should not do after applying at a lender.

  • Pull your report at the time when you apply at a lender
  • If closing takes place 90 days or longer after the report is pulled, another report will need to be pulled prior to closing
  • Don’t increase percentage of credit utilized on credit cards
  • Don’t close or open new accounts
  • Avoid multiple lender pulls / inquiries that are not within 3 weeks of each other
  • Be sure every account is paid on time
  • Be very careful any medical bills don’t wind up in collection
  • If you do have old collection accounts, make sure to avoid contact/negotiations on any such account (that could drop your scores 50 or more points)

A bad credit score can never be rebuilt?

Checking a credit report can hurt your score?

Do you believe in such myths? Debunk many similar credit myths here.

How important is you credit score?

Here is how your credit score changes the interest rate and monthly payment on a typical mortgage loan.

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