Published On
December 14, 2015

With today’s high amount of household debt, credit is more important today than it has ever been. Most people know that credit is a huge factor in getting a good interest rate on things like a car loan or a mortgage. However, did you also know a potential employer could examine your credit to determine how responsible you are? Your credit can also get pulled when applying for car insurance to determine your attitude towards taking risks. Your life is more affected by your credit than you may think.

This may sound scary, but it can actually be a great opportunity if you learn how to use it to your advantage. When people think of how good or bad their credit is they immediately jump to their credit score, completely ignoring their credit report. The problem with that is that your credit score is actually based off of your credit report, and without it, your credit score would not exist.

Your credit score has become the universal metric for judging how trustworthy you are when it comes to lending you money. Despite its popularity, there are still many myths about how credit scores actually work, and the numerous websites all claiming to give you their own version of a credit score don’t make it any easier.

Let’s look at four common questions relating to your credit report, as well as ways to protect and improve your credit:

  • What is my credit report and how is it used?
  • Why do I have three credit reports and how are they different?
  • What information is in my credit reports and what is not?
  • How is my credit score calculated and how can I improve it?

What is my Credit Report and How is it Used?

At its most basic function, your credit report is a tool that lenders, banks, credit unions, credit card companies, etc. use to assess how likely you are to repay your debts. They want to know what the odds are of you paying them back if they lend you money. Your credit report tells them just that.

A long time ago, lenders had no way of knowing this. So a few savvy individuals started interviewing local lenders about who their clients were and whether they paid their loans back on time. They would record and then sell that information to other businesses that could then make informed decisions about how creditworthy local citizens were.

This benefited both banks and consumers. Armed with better information, banks were able to reduce the number of bad loans they made. In return, they were able to reduce the interest rates they charged for the majority of their clients. Eventually, this information was consolidated into a single document called your credit report that is now the industry standard.

Your credit score is a tool lenders can use to determine how risky it is to offer you a mortgage, loan or credit card. The invention of credit reports helped, but even those have their problems. Your credit report has trustworthy data on your loan balances and payment history, but it is up to each bank to interpret that data. One bank could view your credit report and decide you were a good candidate for a loan, while another may decline you. These inconsistencies of opinion were not good for businesses or for consumers.

The next step forward came in the 1980’s, thanks to engineer William Fair and mathematician Earl Isaac who were old colleagues at Stanford. Together they created a formula that could be used by lenders to scientifically determine how risky it was to lend money to someone. What they did was take the information found in your credit report and ran it through an algorithm that spit out a score. It was the first mathematical, unbiased method used by lenders across the country to decide someone’s creditworthiness. Mr. Fair and Mr. Isaac went on to found a business called Fair Isaac and Company, which was eventually shortened to FICO. Nowadays the phrase FICO Score is almost synonymous with credit score, much like how Kleenex is to tissue or iPod is to MP3 player.

Why Do I Have Three Credit Reports and How Are They Different?

Banks loved this information, and due to popular demand, the local credit reporting agencies who gathered this information grew.

FICO’s credit score model took the lending world by storm, and other companies quickly began to imitate them. Soon, competitors developed their own algorithms with their own scores, and this is when things got really confusing. Now, in addition to your FICO Score, you have a Vantage Score, Equifax Score, PLUS Score and more. To top it off, each company’s credit score has different ranges. Your FICO score ranges from 300-850, but some other scoring models top out as high as 990.

Today, we have three major credit reporting agencies: Equifax, Experian and Transunion. These competing companies are basically huge data aggregators who gather and sell information to every major lender in America. That is why you have three credit reports.

Each credit report contains similar information, but they are not identical. Think of the fast food industry. McDonald’s, Carl’s Jr. and Burger King are all nationwide burger restaurants who are similar, but not exactly the same, and they are always in competition to try to differentiate themselves from one another. The same goes for the credit reporting agencies. They all make credit reports, but they gather the data differently, format it differently, etc. Some may think it would be simpler and more convenient to only have one credit report, but having one company in control of that significant amount of data could be a little scary.

Don’t get overwhelmed though. No single score is more or less accurate than another, they just use different formulas. Even though many different scoring models now exist, 90% of top lenders still rely on your FICO Score.[1] As a consumer, this makes your FICO Score the only one you need to worry about. The other scores may be advertised as “free” and they might even be good estimators of your FICO Score, but if you want to see what the banks see, checking your FICO Score is what counts.

Also, not every bank/lender reports to all three credit agencies, which can cause differences between your reports. If you bank with a small credit union, it is likely they will only report to one of the three, say Equifax, for example. Therefore, only your Equifax report would show a history of that credit card. Banks don’t necessarily have to report to any credit agencies if they don’t want to. Remember, the credit agencies provide data to banks and other lenders to help them make better business decisions. The banks can choose whether they want to use that information or not.

Since your FICO Score is calculated by running the data on your credit report through a formula, what happens when each of the credit reports has slightly different information? You end up with three FICO Scores, one from each of your three credit reports. They should be very similar, but don’t worry if they are slightly off. This is why banks typically pull all three and choose your middle score to judge how risky you are. This is also why it is important for you to monitor your FICO Score based off of each credit report.

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Which Information Is in My Credit Reports and Which Isn’t?

Your credit report is a summary of all your credit history and contains information, such as:

  • List of Credit Accounts: mortgages, auto loans, credit cards, etc.
  • Details on Credit Accounts: date open, credit limit, payment history, etc.
  • Credit Inquiries: any time you apply for credit, it is recorded.
  • Public Records: bankruptcies, foreclosures, liens, etc.

Although not every bill will show up on your credit report, it’s still important to make your payments on time. Banks automatically report your payment history on things like credit cards, mortgages, and loans, but not all companies are like this. Things like your cell phone bill, your rent and your utility bills will likely not show up on your credit report. That is unless you are so late on your payments that you get sent to a collections agency, which will negatively affect your credit. In this case, no news is good news.

Other items that will never be included on your credit report are your age, gender, race and marital status. The Equal Credit Opportunity Act (ECOA) of 1974 prohibits lenders from discriminating based off of the above items. Also, your salary and job title will never appear on your credit report. That doesn’t mean though that lenders won’t ask for your salary in addition to analyzing your credit report when making their decision.

How is My Credit Score Calculated?

You already know your FICO Score is calculated using the data on your credit reports, but how exactly does it use that information? FICO is obviously very secret on the exact scoring method, but they have shared the general weighting system they use:

  • Payment History (35%): This is the most important factor of your credit score. Basically, do you make your payments on time? Always pay the full balance, and don’t be late. This will hurt your credit score and lead to unnecessary interest.
  • Amounts Owed (30%): The second most important factor is your “credit utilization ratio.” You want to keep this as low as possible. If you consistently max out your credit cards, even if you pay them off, it looks risky to a lender. Just because your credit limit is $10,000 doesn’t mean you should spend that every month. Call your credit card company and ask them to raise your credit limit. That way, you can spend the same amount, but your ratio will be lower.
  • Lengths of Credit History (15%): Unfortunately there isn’t much you can do to improve this area except wait. Banks like to see a long history of responsible behavior, which is difficult if you’re just starting out. One tip is to open a credit card early to start the clock ticking as soon as possible. Another is to avoid closing old accounts, even if you no longer use them. Doing so will reduce your average credit history, lowering your credit score.
  • Credit Mix (10%): Showing you are capable of handling multiple types of credit proves you are responsible to a potential lender. They like to see a history of credit cards, car loans, and mortgages. Don’t take out loans for no reason, but also don’t avoid debt entirely. Even if you can afford to pay all cash, consider putting only 50% down on that new car and financing the rest.
  • New Credit (10%): Opening several new credit cards or loans in a short period of time looks risky to lenders. Any time a lender pulls your credit report, it is noted, which could temporarily lower your score. However, checking your own score doesn’t have an effect, and rate shopping to get the best deals won’t hurt you either.

Putting it All Together

To summarize, your credit score takes information from your credit report and calculates how likely or unlikely you are to repay your debts. There are many different scores out there, but FICO is still the gold standard. You can check your FICO Score at Checking your FICO Score costs about $20 each time, but is something you should consider doing every year or two, or if you plan on taking out a loan in the near future. This way, you know where you stand and can begin to financially plan.

Your FICO Score may differ depending on which credit report is pulled, so you should also regularly monitor all three reports (Experian, Equifax and Transunion). Luckily you can do this once per year for free at, or by calling each reporting agency. Don’t be fooled by other websites with similar claims! is the only website authorized under law to fill orders for free annual credit reports.[2]

The two biggest factors of your score are paying your bills on time and keeping your balance low relative to your credit limit. Those two areas alone account for 65% of your score, so focus on those if you’re trying to pump up your numbers. Als, remember that it takes time to build good credit, so start now if you haven’t already.

Having good credit is a critical piece of your overall financial success. It will help you get better rates on major purchases, potentially saving you thousands throughout your lifetime. Credit can be a double-edged sword. With reckless spending comes a higher chance of debt and bad credit. However, with the right financial knowledge and through smart spending, you can use credit to leverage your financial resources. Ultimately, the power rests in your hands.

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