Credit Reports, Credit Scores - What's the Difference?

In a blogosphere obsessed with credit scores, a place where decisions are made based on the effect it will have on their FICO, I, Mr. NtJS, am about to say the unthinkable....

I never check my credit score.


Since they checked, and reported it when we bought our house, I know what it was as of a year and a half ago. I do not make a financial decisions based on the effect it will have on my credit score.


Perplexed? Read on - I'll explain.

As if there weren't enough myths, lies and half-truths about credit cards, we have to add in the like for credit scores and credit reports. Seriously, it is a much simpler life when you stop borrowing money. But since I just watched yet another terrible segment on a local news station full of horrid advice, a recommendation of freecreditreport[dot]com (a scam), and little more than some cobbled together information from 5-minutes on google - it seems some clarity is needed.

Here are 10 points on each::

Your Credit Report:
  1. Contains your past payment history and is considered to be your 'financial reputation'.
  2. Includes any delinquencies, bankruptcies, foreclosures, repossessions, and other red flags. These can drop off after 7-10 years depending on which one it is.
  3. Includes open credit accounts of various types.
  4. Does not include your income, investments, or other assets.
  5. Likely contains errors and/or mistakes as you are the only one reviewing it for such inaccuracies. Errors can be challenged, false information can be fixed, but it is not necessarily an easy process.
  6. Can be viewed, once per year, for free, in accordance with federal law at ANNUALCREDITREPORT.com - other sites are a scam. This site is mandated by the government and information is provided by Equifax, TransUnion, and Experian.
  7. Can be viewed by junk-mailers and other random scumbags by 'pre-screening' unless you opt out.
  8. Was never intended for you to see, and was created for lenders to be the end users.
  9. May be reviewed as a part of applying for a job. This is typically done when you will be handling corporate money on a regular basis.
  10. Is used to calculate your credit score.

Your Credit Socre:

  1. Is derived from information in your credit report - nothing more.
  2. Is reported by Experian, Equifax, and TransUnion, but the most widely used is from Fair Issac, known as the FICO score.
  3. Is commonly being used by insurance companies for setting premiums as a predictor for if you are more likely to file a claim. Some states have banned this practice, and is currently under investigation by Congress.
  4. Is commonly used by lenders to determine 'credit worthiness' for risk-based pricing for debt of all kinds, by folks too lazy to look at your actual finances, income, and situation.
  5. Is commonly used by large apartment complexes, though they typically do not see the score, but rather a letter grade from a reporting agency.
  6. Is not considered negative because of a lack of information.
  7. Is not necessary for obtaining a prime-rate mortgage as many lenders will do it the old fashioned way via manual underwriting.
  8. Is not readily available to you without paying for it or signing up for a different service that includes access.
  9. Is not a measure of financial success.
  10. Does not need to be 'built', 'managed', or an important part of your life.
Once upon a time, people had no legal right to view any of this information. Ever. As I mentioned before, consumers were not intended to be the end user of this service. Lenders were the end user. The Fair Credit Reporting Act gave you, Joe Consumer, the right to review this information and the Fair and Accurate Credit Transactions Act gave us the ability to do so, online and for free on an annual basis. The latter was only signed into law in 2003.

Since then, we've had FICO score hysteria. Myths, half-truths, and outright lies spread - partially fueled by my favorite shill, Suze Orman. Lazy lenders, insurers, and landlords have jumped on the easy risk-based assessments. But is it a valid measure of... anything? Dave Ramsey commonly refers to the FICO as the "I love debt" score, and I tend to agree with him. Here's why:

FICO Score breakdown (from myfico.com, with my comments in italics)
  • 35% is your "payment history" - Making payments on debt, other delinquencies would show up here.
  • 30% is your "amount owed" - How much debt you are carrying.
  • 15% is your "length of credit history" - How long have you been in debt or carried revolving debt.
  • 10% is "new credit" - Are you still taking on more debt.
  • 10% is "types of credit used" - Have various types of debt, like a mortgage, car loans, student loans, personal loans, credit cards....
You can see why Ramsey commonly refers to the FICO score as an "I love debt" score. The only way to build and maintain this thing is to go into debt and stay in debt - forever. It is not a measure of winning financially. The majority of the score indicates a willingness to pay payments for a very long time. Only 35% would cover if you payed your bills (such as utilities) or had major delinquencies (BK, foreclosure, repo). Even then, income, investments, good money management skills, and other positive behaviors are not accounted for here. Just debt. Only debt. You want to stay in debt? You want to remain enslaved to banks and credit cards? Not us.

We're done with debt, and our FICO scores can go jump in the creek.

The beautiful part about it all is: My score is actually pretty great - my wife's is even better. I've never had a personal credit card in my name. I've never done a single thing with the intent of boosting my score. We pay our bills (I used to not be so good about that). We manage our money very well (I screwed up many times in college with my debit card and it never affected my credit). We stopped borrowing money 4+ years prior to, and were debt-free 2 years prior to buying this house. Even then, many folks were jealous of the low rate we got on our 15-year fixed rate mortgage. Don't listen to the rhetoric, get in touch with reality.


neimanmarxist said...

this is a really useful post. we've made the typical college-student financial mistakes (you know, went broke, paid phone bill late, paid it eventually) and we're not really in the habit of obsessing over our credit score. don't think we'd ever bother 'doing things' to get a good credit score beyond getting & staying out of debt. thanks for the useful fact-sheet. it will come in handy.

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