Credit Basics

Credit scores are generated using information in your credit files.

Each file can have all the same information or vastly different data. One creditor may not report all your information to all three bureaus. Or one of your files might be missing the maximum limit on your credit card, making it appear that you are overextended.

Rather than creating a new credit scoring system, the bureaus should focus on fixing a problem that troubles many consumers and consumer advocates.

If any of your credit reports has incorrect information, is missing critical information or if some data isn't even being reported, this can reduce your score no matter what the scoring formula.

"There is still a huge problem with the data being reported to the agencies,"says Evan Hendricks, editor and publisher of Privacy Times newsletter and author of "Credit Scores & Credit Reports: How The System Really Works, What You Can Do."

Hendricks is particularly outraged that some credit card companies refuse to report the credit limits for their consumers.

How important is that fact?

Let's say you have a credit card with a limit of $10,000. You have an outstanding balance of $2,500 and that's the highest balance you've ever had on that particular card. But as a policy, the credit card company doesn't report your credit limit. In the credit scoring formula, your highest balance of $2,500 could be substituted for your maximum credit limit. That in turn could make it appear that you are maxed out on that card.

Maxing out on your credit limit can significantly lower your credit score because the amount you owe (or your credit utilization rate) accounts for 30 percent of your score in the FICO formula. While the credit bureaus haven't disclosed how it will rate credit utilization under VantageScore, it's likely to be similar to the FICO model.

The credit bureaus and the government should make sure the data being reporting to the bureaus is as accurate as it could be. Right now there is no large-scale, independent auditing to determine how accurate credit reports are.

"There is no need for a new system," said Richard LeFebvre, president of AAA Credit, who has worked in the credit reporting industry for 15 years. "There are four variations just within the mortgage arena alone, with different models, varied depending on the creditor. Your model is only as good as the underlying data."

© The Washington Post