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Credit Profile vs. Credit Score
Monday, Aug 20, 2007
Question: What is the difference between a credit "profile" and a credit score? I have been trying to renegotiate my interest rates with my credit cards and am told based on my credit profile they cannot help me at this time. I was told that timely payments mean nothing if I'm only making minimums, is this true?
Answer: The three major credit reporting bureaus in the United States–Equifax, Experian, and TransUnion–each maintain a database of information about the borrowing and payment habits of virtually all adult Americans, called a credit report or credit profile. The bureaus provide this information to credit lenders, such as mortgage companies, auto lenders, and credit card banks, to assist them in determining the credit risk associated with lending money to a given consumer. Most credit lenders also report information about their customers’ accounts, including payment history, loan balances, and credit limits to the credit bureaus to assist the bureaus in maintaining up-to-date data about each consumer’s credit habits. In addition, if a lender requests a copy of your credit report based on your applying for new credit, the request will appear on your credit report as an “inquiry,” which can notify lenders if you are trying to obtain too much credit in a given period of time, a possible sign of financial distress. These inquiries, along with the information provided by your current creditors and information gathered from other public sources, such as court records, are the primary components of your credit report. If you are interested in viewing your credit report, you are entitled to a free copy of your report from each of the three credit bureaus once every 12 months, which you may request by visiting www.annualcreditreport.com Everything that appears on your credit report PLUS your cash flow situation (most frequently determined by your debt to income ratio) are the key elements of your credit profile... which is basically how a lender would look at you.Your credit score is a mathematical analysis of the information contained in your credit profile which assigns you a number, your credit score, based on your purported credit worthiness. By boiling down all of the data in your credit report to a single number, credit scores allow lenders to make decisions about potential borrowers much faster. The best known and most widely used scoring model, the FICO score, was developed by the Fair Isaac Company, and is used with slight variations by the three major credit bureaus.
FICO uses a score range between 300 and 850, with 300 indicating an extremely high credit risk and an 850 meaning very low risk. Because the complexity of the statistical analysis used in credit scoring, and the fact that the scoring algorithms are not publicly available, you cannot accurately figure your own credit score. However, Fair Isaac has made public the general criteria it uses in calculating credit score. So based on information in your credit report, you should be able to tell which items in your report are helping or hurting your credit score. Unfortunately, you are not entitled to a free credit score from the website mentioned above, but when you request your credit report, the bureaus should allow
you to pay a small fee to also obtain your credit score.
There are five key factors that go into calculating your credit score, with certain items carrying more weight than others. These factors are as follows:
1) Payment history, which counts for approximately 35% of your score, is the most heavily weighted factor used in calculating your credit score. Consistently paying your bills on time has a positive influence on your score, while late or missed payments will hurt you in this area. If you have delinquent payments, the older the delinquency the less the negative impact on your score will be. Collection accounts and bankruptcy filings are also taken into consideration when analyzing your payment history.
2) Total debt and total available credit, which counts for about 30%. This section looks at how much debt you have compared to the total available credit on your accounts. If all of your accounts are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already incurred. If your account balances are relatively low compared to your available credit, this part of the risk analysis should help your overall credit score. The score calculation also looks at these two factor independently. Having too much available credit, whether you have used it or not, could hurt your credit score, as statistical studies have shown that people with excessive amounts of available credit are a higher credit risk. Unfortunately, the bureaus do not define exactly what they consider excessive, so best tip is to use credit conservatively and to keep your debt to credit limit ratio low.
3) Length of positive credit history, which counts for about 15%. The longer you maintain accounts in good standing, the better your score will be. This shows that you are able to make a long-term commitment to a creditor and are consistently responsible about making your payments.
4) Mix of types of credit, which counts for approximately 10%. Having several different types of credit, such a credit cards, consumer loans, and secured debt, will have a positive influence on your credit score. Having too much of one type of credit can have a negative impact.
5) The number of new credit applications you have recently completed, which accounts for about 10% of your score. Applying for too much new credit in a short time period makes indicates that you could be credit risk, as you may be desperately trying to keep your head above water. The models make an exception for people who are shopping around for a loan, so if you are simply applying to see who can give you the best rate on a new loan, you need not worry too much about damaging your credit score.
As you can see, your past payment history is
There are five key factors that go into calculating your credit score, with certain items carrying more weight than others. These factors are as follows:
1) Payment history, which counts for approximately 35% of your score, is the most heavily weighted factor used in calculating your credit score. Consistently paying your bills on time has a positive influence on your score, while late or missed payments will hurt you in this area. If you have delinquent payments, the older the delinquency the less the negative impact on your score will be. Collection accounts and bankruptcy filings are also taken into consideration when analyzing your payment history.
2) Total debt and total available credit, which counts for about 30%. This section looks at how much debt you have compared to the total available credit on your accounts. If all of your accounts are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already incurred. If your account balances are relatively low compared to your available credit, this part of the risk analysis should help your overall credit score. The score calculation also looks at these two factor independently. Having too much available credit, whether you have used it or not, could hurt your credit score, as statistical studies have shown that people with excessive amounts of available credit are a higher credit risk. Unfortunately, the bureaus do not define exactly what they consider excessive, so best tip is to use credit conservatively and to keep your debt to credit limit ratio low.
3) Length of positive credit history, which counts for about 15%. The longer you maintain accounts in good standing, the better your score will be. This shows that you are able to make a long-term commitment to a creditor and are consistently responsible about making your payments.
4) Mix of types of credit, which counts for approximately 10%. Having several different types of credit, such a credit cards, consumer loans, and secured debt, will have a positive influence on your credit score. Having too much of one type of credit can have a negative impact.
5) The number of new credit applications you have recently completed, which accounts for about 10% of your score. Applying for too much new credit in a short time period makes indicates that you could be credit risk, as you may be desperately trying to keep your head above water. The models make an exception for people who are shopping around for a loan, so if you are simply applying to see who can give you the best rate on a new loan, you need not worry too much about damaging your credit score.
As you can see, your past payment history is
the single most important factor used in determining your credit score. Making timely payments to your creditors, even if you are only making the minimum payment, will reflect a positive payment history on your credit report, and should therefore improve your credit score. However, if you are carrying high balances on the accounts in question, these accounts could be negatively affecting your debt to available credit ratio, which could be dragging down your credit rating. If you are able to pay more than your minimum balance each month, it should lower your debt amount, and therefore improve your credit score. If you cannot afford more than the minimum, continuing to make at least your minimum payments each month will maintain your positive payment history.
Since each of the three credit bureaus maintain a separate record for each consumer, information may appear on one of your credit reports that does not appear on the other. Also, the bureaus each use slightly different scoring algorithms, which means that your credit score can vary significantly from one bureau to the next. Thankfully, many lenders use the middle of the three scores when making loan decisions, which should help consumers with a large variance between the three bureaus. Once you have a copy of your credit report and credit score from each credit bureau, you can review your reports, paying attention to the five factors I mentioned above, to get an idea of whether the accounts listed on your credit report are hurting or helping your credit score. You can then take action to improve any potential problems, such as paying down your balances, paying off collection items, or disputing items that are inaccurate.
Factors such as age, sex, income, and length of employment, have no direct affect on your credit score, and are not considered when the bureaus calculate your score. However, you should keep in mind that for most lenders, your credit score is only one aspect, albeit an important one, of your overall “credit worthiness,” meaning the creditor’s view of your ability to repay a loan . Your income, for example, is not considered in the calculation of your FICO score, but most lenders will ask you what you earn to analyze your ability to repay the loan. Even if you have an 800 FICO score, if your income is only $10,000/year, a lender will probably not loan you a large sum of money, because, despite your past credit habits as measured by your FICO score, the lender can see that you probably cannot repay the loan.
If you would like to learn more about credit reports, credit scoring, and what it means to you, I encourage you to explore the wealth of material offered by Bills.com at http://www.bills.com/credit/
I hope this information helps you Find. Learn. Save.
Best,
Bill
www.bills.com
Since each of the three credit bureaus maintain a separate record for each consumer, information may appear on one of your credit reports that does not appear on the other. Also, the bureaus each use slightly different scoring algorithms, which means that your credit score can vary significantly from one bureau to the next. Thankfully, many lenders use the middle of the three scores when making loan decisions, which should help consumers with a large variance between the three bureaus. Once you have a copy of your credit report and credit score from each credit bureau, you can review your reports, paying attention to the five factors I mentioned above, to get an idea of whether the accounts listed on your credit report are hurting or helping your credit score. You can then take action to improve any potential problems, such as paying down your balances, paying off collection items, or disputing items that are inaccurate.
Factors such as age, sex, income, and length of employment, have no direct affect on your credit score, and are not considered when the bureaus calculate your score. However, you should keep in mind that for most lenders, your credit score is only one aspect, albeit an important one, of your overall “credit worthiness,” meaning the creditor’s view of your ability to repay a loan . Your income, for example, is not considered in the calculation of your FICO score, but most lenders will ask you what you earn to analyze your ability to repay the loan. Even if you have an 800 FICO score, if your income is only $10,000/year, a lender will probably not loan you a large sum of money, because, despite your past credit habits as measured by your FICO score, the lender can see that you probably cannot repay the loan.
If you would like to learn more about credit reports, credit scoring, and what it means to you, I encourage you to explore the wealth of material offered by Bills.com at http://www.bills.com/credit/
I hope this information helps you Find. Learn. Save.
Best,
Bill
www.bills.com
Also, make sure to get a free financial health check-up with Bills IQ!
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1. Posted by Scott on Wednesday 7th November 2007 15:05
Not sure this answered the question. Don't card issuers use a credit "profile" (not a report nor a score) to determine whether a given applicant qualifies for a given offer?
2. Posted by Park Brees on Thursday 8th November 2007 12:04
Creditors use both. Creditors determine eligibility for a loan based on several factors that include a credit "profile" and credit report. Some factors analyzed from a credit "profile" would include residence history, employment history, and wages earned. They also analyze factors from a credit report such as FICO score, payment history, and balance to credit ratios (amount of credit available vs. amount of credit used). These various factors used not only determine eligibility for the loan, but also the repayment terms. Each creditor uses its own credit risk model to determine eligibility. Therefore, it may be possible to be approved for a loan with one company and turned down by another.