What Are Credit Scores, Credit Reports and How Do They Work?

What Are Credit Scores, Credit Reports and How Do They Work?

A credit report is a report containing detailed information about a person's credit history, including personal identifying information (such as name, address and social security number), credit accounts and loans, bankruptcies and late payments, and recent inquiries. It can be obtained by prospective lenders and others with access to the system, with the borrower's permission, to determine his or her creditworthiness.

Credit Bureaus

A credit bureau (U.S.), or credit reference agency (UK) is a company (typically called a "consumer reporting agency" or CRA) that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. This helps lenders assess credit worthiness, the ability to pay back a loan, and can affect the interest rate and other terms of a loan. Interest rates are not the same for everyone, but instead can be based on risk-based pricing, a form of price discrimination based on the different expected risks of different borrowers, as set out in their credit rating or credit score. Consumers with poor credit repayment histories or court adjudicated debt obligations like tax liens or bankruptcies will pay a higher annual interest rate than consumers who don't have these factors.

In the U.S., credit bureaus collect and collate personal information, financial data, and alternative data on individuals from a variety of sources called data furnishers with which the bureaus have a relationship. Data furnishers are typically creditors, lenders, utilities, debt collection agencies and the courts (i.e. public records) that a consumer has had a relationship or experience with. Data furnishers report their payment experience with the consumer to the credit bureaus. The data provided by the furnishers as well as collected by the bureaus are then aggregated into the credit bureau's data repository or files. The resulting information is made available on request to customers of the credit bureau for the purposes of credit assessment, credit scoring or for other purposes such as employment consideration or leasing an apartment.

In the United States, key credit bureau consumer protections and general rules or governing guidelines for both the credit bureaus and data furnishers are the federal Fair Credit Reporting Act (FCRA), Fair and Accurate Credit Transactions Act (FACTA), Fair Credit Billing Act (FCBA), and Regulation B.

Credit Scores

A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. The term "credit reputation" can either be used synonymous to credit history or to credit score.  A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus.

The factors which may influence a person's credit rating are:

  • ability to pay a loan
  • interest
  • amount of credit used
  • saving patterns
  • spending patterns
  • debt

Given the large number of consumer borrowers, these credit scores tend to be mechanistic. To simplify the analytical process for their customers, the different credit bureaus can apply a mathematical algorithm to provide a score the customer can use to more rapidly assess the likelihood that an individual will repay a given debt given the frequency that other individuals in similar situations have defaulted. This means there is no one credit score, but several (or more): each credit bureau creates their own credit score for each individual.

Most credit scores go up to about 800, with anything over 700 being a pretty good score.

While there are different methods of calculating credit scores, FICO is the most widely known type of credit score. FICO is a credit score developed by Fair Isaac Corporation. It is used by many mortgage lenders that use a risk-based system to determine the possibility that the borrower may default on financial obligations to the mortgage lender. The credit bureaus all have their own credit scores: Equifax's ScorePower, Experian's PLUS score, and TransUnion's credit score, and each also sells the VantageScore credit score. In addition, many large lenders, including the major credit card issuers, have developed their own proprietary scoring models

Free Credit Reports

Most consumer welfare advocates advise individuals to review their credit reports at least once per year, in order to ensure that the reports are accurate. Consumers can do so at no cost. They are entitled to a free annual credit report from each of the three nationwide consumer reporting agencies, Equifax, Experian, and TransUnion . In the United Kingdom, the main credit reference agencies for individuals are Experian, Equifax, and Callcredit. There is no universal credit rating as such, rather each individual lender credit scores based on its own wish-list of a perfect customer.

The Federal Trade Commission, the nation's consumer protection agency, will tell you that there is only one authorized website where you can request a free credit report under U.S. federal law. This is due to a recent amendment to the federal Fair Credit Reporting Act requiring each of the nationwide consumer reporting companies - Equifax, Experian, and TransUnion - to provide you with a free copy of your credit report, at your request, once every 12 months. Many other websites claim to offer "free" credit reports, but may charge you for another product if you accept a "free" report. Don't be taken in by the misleading advertising from FreeCreditReport.com or others!

How are credit scores and credit reports used?

Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system.

Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, employers, and government departments employ the same techniques. Credit scoring also has a lot of overlap with data mining, which uses many similar techniques.

In the U.S., when a customer fills out an application for credit from a bank, store or credit card company, their information is forwarded to a credit bureau. The credit bureau matches the name, address and other identifying information on the credit applicant with information retained by the bureau in its files.

How can a consumer improve his or her credit score?

Since a credit score is a measure of an individual's willingness to repay a debt, making payments on time is the basic key to a good score. Lenders like to see consumer debt obligations paid on a monthly basis.

Another factor in determining a good credit score is income. The higher the income, all other things being equal, the more credit the consumer can access. However, lenders make credit granting decisions based on both ability to repay a debt (income) and willingness (the credit report) as indicated in the past payment history.

These factors help lenders determine whether to extend credit, and on what terms. With the adoption of risk-based pricing on almost all lending in the financial services industry, this report has become even more important since it is usually the sole element used to choose the annual percentage rate (APR), grace period and other contractual obligations of the credit card or loan.

How to Stop Unwanted Credit Card Offers:

You may request that consumer credit reporting companies exclude your name from lists for pre-approved, unsolicited credit and insurance offers.  Blocking credit card pre-approvals helps to prevent identity theft, especially if you are planning to move. The credit card companies continue to send out the pre-approvals to your old address even after you move. Identity thieves can take those forms out of your old mailbox and send them in. You can either opt out permanently or for five years. You can either call 1-888-5-OPT-OUT or go to optoutprescreen.com.

Note that it  doesn't stop all the offers: frequent flier cards and hotel reward cards aren't blocked.

Credit Freezes

See this page for detailed information about how to freeze your credit to protect your identity and prevent scammers from opening accounts in your name!

Credit outside the United States

United Kingdom

In the United Kingdom, the three credit reference agencies are Experian, Equifax and Callcredit, which works closely with its US partner, TransUnion.

Most banks and other credit-granting organisations subscribe to one or more of these organisations to ensure the quality of their lending. This includes companies who sell goods or services on credit such as credit card issuers, utility companies and store card issuers. Subscribing organisations are expected to provide relevant data to maintain the common data pool.

Credit reference agencies are bound by the Data Protection Act, which requires that data relating to identifiable individuals must be accurate, relevant, held for a proper purpose and not out-of-date. Individuals have a legal right to access data held on them.

The activities of Credit Reference Agencies are governed by the Consumer Credit Act 1974.


The establishment of Credit Information Bureau (India) Limited (CIBIL), India's first Credit Information Bureau, is an effort made by the Government of India and the Reserve Bank of India to improve the functionality and stability of the Indian financial system by containing NPAs while improving credit grantors' portfolio quality.

CIBIL was promoted by State Bank of India (SBI), Housing Development Finance Corporation (HDFC), Dun & Bradstreet Information Services India Private Limited (D&B) and TransUnion International Inc. (TransUnion) to provide comprehensive credit information by collecting, collating and disseminating credit information pertaining to both commercial and consumer borrowers, to a closed user group of Members.
This section may require cleanup to meet Wikipedia's quality standards.
Please improve this article if you can. (October 2008)

The promoters SBI and HDFC divested a part of their stake to other shareholders and the revised shareholding stands as follows:

Shareholder Holding%

  1. SBI 10.0%
  2. HDFC 10.0%
  3. Dun & Bradstreet 10.0%
  4. Trans Union 10.0%
  5. ICICI Bank 10.0%
  6. Bank of Baroda 5.0%
  7. Bank of India 5.0%
  8. HSBC 5.0%
  9. IOB 5.0%
  10. PNB 5.0%
  11. Union Bank 5.0%
  12. Citicorp Finance 5.0%
  13. Central Bank 5.0%
  14. Stan C k 5.0%
  15. Sundaram Finance 2.5%
  16. GE Strategic Investments India 2.5%

Total 100.0%

Related Resources:

You can also request your free credit report by telephone. Call toll free: 1 877 322 8228. Hearing impaired consumers can access their TDD service at 1 877 730 4104.

Credit Repair is also an area that is filled with scams. To find out more about see the Federal Trade Commission Credit Repair website.

For an excellent and entertaining object lesson about investing for the future, see this page!

And please let us know about any suspicious calls or emails you receive.  We look for patterns so that we can alert the authorities and victims to new scams, before it is too late!




For a comprehensive list of national and international agencies to report scams, see this page.

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