How to Protect Yourself From Taxpayer Identity Theft

Tax identity theft happens when an identity thief swipes your Social Security number, files a tax return and claims a fraudulent refund from the U.S. government.

You may not know that an identity thief has struck until your legitimate tax return gets rejected because a thief used your Social Security number to file a phony return ahead of you.

You might also learn about taxpayer ID theft from a notice by the Internal Revenue Service.

Watch Out for Tax Identity Theft Scams

Beware of email scams. The IRS does not contact taxpayers by email or social media to request personal or financial information. If you receive such a communication, report it to the IRS by forwarding it to phishing@irs.gov.

Phone scams. Beware of scammers claiming to be an IRS agent and threatening you with arrest or deportation if you don’t pay, or asking for your financial information so they can send you a refund. Report scam phone calls to the Treasury Inspector General for Tax Administration at 1-800-366-4484 or online at IRS Impersonation Scam Reporting.

Text messages purporting to be from the IRS are also a scam. Be sure to report them as well.

Protect Your Social Security Number

• Do not carry your Social Security card in your wallet. Keep your Social Security card and any other document that shows your Social Security number in a safe place.
• Only share your Social Security number when absolutely necessary.
• Safeguard your personal financial information in your home and on your computer. Change online passwords regularly.
• Review your credit reports and your Social Security Administration earnings statement each year for accuracy.

Monitoring your credit score regularly is another way to watch out for identity theft. A big unexpected change in your credit score might mean a thief has struck. 

What to Do If You Are a Victim of Tax Identity Theft

Report the crime. File a report with your local police and file a complaint with the Federal Trade Commission at www.identitytheft.gov or by calling the FTC Identity Theft Hotline at 1-877-438-4338.

Request a fraud alert. Contact one of the three major credit reporting agencies, Equifax, Experian, or TransUnion, and ask that a fraud alert be placed on your credit records.

Close fraudulent accounts. Close any credit or financial account that has been tampered with by a thief or opened without your permission.

Contact the IRS. Call the number provided on the IRS notice informing you of the fraud. Complete IRS Form 14039, Identity Theft Affidavit. You can use a fillable form at IRS.gov, print, then mail or fax the form as needed as you clear your tax record.

Pay your taxes. Be sure to continue to pay your taxes and file your tax return on time, even if you must do so by mailing in paper forms.

Stay diligent. If you contacted the IRS about taxpayer ID theft and did not receive a resolution, contact the Identity Protection Specialized Unit at 1-800-908-4490 about your case.

What Is a Tax Lien?

The federal government takes it very seriously if you fail to pay your taxes. And it can be serious for your credit reports and credit scores, too.

Not paying Uncle Sam his due could result in a tax lien being placed on your assets. A federal tax lien is the U.S. government’s legal claim against your property when you fail to pay a tax debt.

Once you fail or neglect to pay a tax liability on time, the IRS files a public document, a notice of federal tax lien, alerting creditors that the government has a legal right to your property.

A tax lien means bad news for your credit. Consumers with no other negative items who have a tax lien appear on their credit reports could see their credit scores plummet by 100 points or more.

A tax lien stays on your credit report for seven years from the date it is paid. And a tax lien could impact your credit for even longer if you should wait to resolve your tax liability.

Fortunately for consumers, the IRS made some changes to its policies concerning tax liens in early 2011 including:

• Increasing the dollar threshold when liens are generally issued to $10,000.
• Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.
• Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.

These changes mean it is possible to get a tax lien removed from your credit reports if you’ve paid it before the normal seven-year reporting period is up, or while you still owe taxes if you are paying them back through an installment agreement with the IRS. To have a tax lien withdrawn, you must file Form 12277, requesting the lien be withdrawn. If your request is accepted, the IRS will file a notice of the withdrawal and send you a copy.

You also may request in writing that the IRS notify credit reporting agencies and creditors and your financial institutions about the tax lien withdrawal. Or you can send the notice of withdrawal from the IRS to the credit reporting agencies yourself.

Tax liens can have a major impact on your credit, appearing as a negative account on your credit report.

Do Taxes Affect Your Credit Score?

 

Owing the IRS a big tax bill come April 15 doesn’t automatically affect your credit. But how you choose to pay your taxes does, and unpaid taxes may impact your credit as well.

Here are some ways that you can pay your tax bill and how they impact your credit.

Payment Option 1: A Personal Loan

If you apply for a personal loan to cover a larger-than-anticipated tax bill, the loan amount and your monthly payment record will be noted in your credit reports. And the loan application itself will count as an inquiry into your credit and this will lower your credit score a little bit, though the drop is temporary.

If you need to apply for a personal loan to cover a tax bill, begin by getting a free look at your credit strengths and weaknesses using CreditCheckTotal.com. Minimize loan applications by finding out a lender’s minimum credit score requirements in advance. Choose a lender with credit requirements that match your credit score.

Payment Option 2: A Credit Card

Charging a big tax bill is certainly an option for consumers with credit cards with roomy credit lines. But there are consequences to your credit score if you’re already using a large amount of your available credit. Charging a credit card near its limit can hurt your credit utilization ratio. Your credit utilization takes the total amount of debt you have on all of your revolving credit accounts (i.e. credit cards) and compares it to your accounts’ limits. And this important measurement makes up about 30% of your credit score.

Payment Option 3: An Installment Agreement

Agreeing to pay a tax bill by an installment agreement with the IRS doesn’t affect your credit since installment agreements are not reported to the credit reporting agencies.

The Effect of Non-Payment: A Tax Lien

Failing or neglecting to pay your tax bill could affect your credit, especially if your tax bill is $10,000 or more, the threshold when the IRS generally issues a tax lien against citizens.

A tax lien is considered a serious negative item and could remain on your credit report for seven years after the tax liability is resolved, unless you take steps to have it withdrawn.

In 2011, the IRS made some changes to its tax lien policies making it easier for taxpayers to get lien withdrawals after paying their tax bills and in most cases withdrawing tax liens when a taxpayer enters into a Direct Debit Installment Agreement.

Whatever strategy you choose to resolve your tax debt, it’s a good idea get your free credit reports and free credit scores to make sure there are no unexpected surprises.

FICO INFO WEEK: What’s in my credit report?

Although each credit reporting agency formats and reports this information differently, all credit reports contain basically the same categories of information. Your social security number, date of birth and employment information are used to identify you. These factors are not used in credit scoring. Updates to this information come from information you supply to lenders.

• Identifying Information.
  Your name, address, Social Security number, date of birth and employment information are used to identify you. These factors are not used in credit scoring. Updates to this information come from information you supply to lenders.
• Trade Lines.
  These are your credit accounts. Lenders report on each account you have established with them. They report the type of account (bankcard, auto loan, mortgage, etc), the date you opened the account, your credit limit or loan amount, the account balance and your payment history.
• Credit Inquiries.
  When you apply for a loan, you authorize your lender to ask for a copy of your credit report. This is how inquiries appear on your credit report. The inquiries section contains a list of everyone who accessed your credit report within the last two years. The report you see lists both "voluntary" inquiries, spurred by your own requests for credit, and "involuntary" inquires, such as when lenders order your report so as to make you a pre-approved credit offer in the mail.
• Public Record and Collection Items.
  Credit reporting agencies also collect public record information from state and county courts, and information on overdue debt from collection agencies. Public record information includes bankruptcies, foreclosures, suits, wage attachments, liens and judgments.

Fico Scores

How my FICO Scores are calculated

The first thing any lender wants to know is whether you've paid past credit accounts on time. This is one of the most important factors in a FICO^® Score.

Amounts FICO^® Scores are calculated from several different pieces of credit data in your credit report. This data is grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining how your FICO Scores are calculated.

Your FICO Scores consider both positive and negative information in your credit report. Late payments will lower your FICO Scores, but establishing or re-establishing a good track record of making payments on time will raise your score.

How a FICO Score breaks down

These percentages are based on the importance of the five categories for the general population. For particular groups—for example, people who have not been using credit long—the relative importance of these categories may be different

Importance of categories varies per person

Your FICO Scores are calculated based on these five categories. For some groups, the importance of these categories may vary; for example, people who have not been using credit long will be factored differently than those with a longer credit history.

The importance of any one factor in your credit score calculation depends on the overall information in your credit report. For some people, one factor may have a larger impact that it would for someone with a much different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO^® Scores.

Therefore, it’s impossible to measure the exact impact of a single factor in how your credit score is calculated without looking at your entire report. Even the levels of importance shown in the FICO Scores chart are for the general population, and will be different for different credit profiles.

Payment history (35%)

owed (30%)

Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower with a low FICO^® Score.

Length of credit history (15%)

In general, a longer credit history will increase your FICO^® Scores. However, even people who haven't been using credit long may have high FICO Scores, depending on how the rest of the credit report looks.

Your FICO Scores take into account:

• how long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts
• how long specific credit accounts have been established
• how long it has been since you used certain accounts

Types of credit in use (10%)

FICO Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.

New credit (10%)

Research shows that opening several credit accounts in a short period of time represents a greater risk - especially for people who don't have a long credit history.

FICO INFO WEEK: About your credit score

Your credit score influences the credit that’s available to you and the terms (interest rate, etc.) that lenders offer you. It’s a vital part of your credit health.

When you apply for credit – whether for a credit card, a car loan, or a mortgage – lenders want to know what risk they'd take by loaning money to you. When lenders order your credit report, they can also buy a credit score that’s based on the information in the report. A credit score helps lenders evaluate your credit report because it is a number that summarizes your credit risk, based on a snapshot of your credit report at a particular point in time.

Credit scores are often called “FICO Scores” because most credit bureau scores used in the U.S. are produced from software developed by FICO (Fair Isaac and Company). But it’s important to understand that not every credit score you can buy online is a true FICO Score.

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About FICO Scores

The most widely used credit scores are FICO Scores, the credit score created by Fair Isaac Corporation. Lenders use FICO Scores to help them make billions of credit decisions every year. Fair Isaac calculates FICO Scores based solely on information in consumer credit reports maintained at the credit reporting agencies.

FICO Scores range from 300 to 850. FICO Scores are calculated by a mathematical equation that evaluates many types of information from your credit report, at that agency. By comparing this information to the patterns in hundreds of thousands of past credit reports, FICO Scores estimate your level of future credit risk.

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Other names for FICO Scores

FICO Scores have a different name at each of the credit reporting agencies. All of these scores, however, are developed using the same methods by Fair Isaac, and have been rigorously tested to ensure they provide the most accurate picture of credit risk possible using credit report data.

Credit Reporting Agency	FICO Score
Equifax	FICO® Risk Score, Classic
Experian	FICO® Risk Score, Classic
TransUnion	FICO® Risk Score, Classic

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What makes a “good” FICO Score

FICO Scores have a 300–850 score range. The higher the score, the lower the risk. But no score says whether a specific individual will be a “good” or “bad” customer.

While many lenders use FICO Scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no single “cutoff score” used by all lenders and there are many additional factors that lenders use to determine your actual interest rates.

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Reasons for your credit score

When a FICO Score is calculated from your credit report, the credit reporting agency will also provide up to five reasons for that particular score. While these reasons are usually negative, because it is the reasons why the credit score isn’t higher. For a very high score, it can include those positive reasons contributing to that score.

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The minimum required to calculate a FICO Score

For your FICO Score to be calculated, your credit report with the bureau from which you want your score must contain enough information—and enough recent information—on which to base your credit score. Generally, that means you must have at least one account that has been open for six months or longer, and at least one account that has been reported to the credit reporting agency within the last six months.

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3 different FICO Scores

You have FICO Scores for each of the three credit bureaus: Equifax, TransUnion and Experian. Each FICO Score is based on information the credit bureau keeps on file about you.

FICO Scores from each credit reporting agency consider only the data in your credit reports at that agency. Your credit scores may be different at each of the main credit reporting agencies. If your current scores from the credit reporting agencies are different, it’s probably because the information those agencies have on you differs. If your information is identical at all three credit reporting agencies, your FICO Scores from each bureau should be close.

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Your FICO Scores will change over time

As the information in your credit report changes, so will any new credit score based on your credit report. So your FICO Scores from a month ago are probably not the same score a lender would get from the credit reporting agency today.

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More than one credit score

In general, when people talk about "your score" they're talking about your current FICO Scores. While FICO Scores are the most commonly used credit risk scores in the US, there is no one credit score used to make decisions about you.

Lender’s own credit scores

Lenders will often evaluate FICO Scores as well as other information that they have about you. This includes information gathered if you are a previous or current customer of theirs.

Other credit bureau scores

There are other credit bureau scores, although FICO Scores are by far the most commonly used. Other credit bureau scores may evaluate your credit report differently than FICO Scores, and in some cases a higher score may mean more risk, not less risk as with FICO Scores.

Application risk scores

Many lenders use scoring systems that include FICO Scores but also consider information from your credit application.

Customer risk scores (aka “behavior scores”)

A lender may use customer risk scores to make credit decisions on its current customers. Also called “behavior scores,” these scores generally consider FICO Scores along with information on how you have paid that lender in the past.

Other credit scores

These scores may evaluate your credit report differently than FICO Scores, and in some cases a higher score may mean more risk, not less risk as with FICO Scores. When purchasing a credit score for yourself, most experts recommend getting your FICO Scores, as these are the scores most lenders use when making credit decisions.

FICO INFO WEEK: How credit scoring helps me

Credit scores give lenders a fast, objective measurement of your credit risk. Before the use of scoring, the credit granting process could be slow, inconsistent and unfairly biased.

Credit scores – especially FICO® scores, the most widely used credit bureau scores – have made big improvements in the credit process. Because of credit scores:

• People can get loans faster.
  Scores can be delivered almost instantaneously, helping lenders speed up loan approvals. Today many credit decisions can be made within minutes. Even a mortgage application can be approved in hours instead of weeks for borrowers who score above a lender's “score cutoff”. Scoring also allows retail stores, Internet sites and other lenders to make “instant credit” decisions.
• Credit decisions are fairer.
  Using credit scoring, lenders can focus only on the facts related to credit risk, rather than their personal feelings. Factors like your gender, race, religion, nationality and marital status are not considered by credit scoring.
• Credit “mistakes” count for less.
  If you have had poor credit performance in the past, credit scoring doesn't let that haunt you forever. Past credit problems fade as time passes and as recent good payment patterns show up on your credit report. Unlike so-called “knock out rules” that turn down borrowers based solely on a past problem in their file, credit scoring weighs all of the credit-related information, both good and bad, in your credit report.
• More credit is available.
  Lenders who use credit scoring can approve more loans, because credit scoring gives them more precise information on which to base credit decisions. It allows lenders to identify individuals who are likely to perform well in the future, even though their credit report shows past problems. Even people whose scores are lower than a lender's cutoff for “automatic approval” benefit from scoring. Many lenders offer a choice of credit products geared to different risk levels. Most have their own separate guidelines, so if you are turned down by one lender, another may approve your loan. The use of credit scores gives lenders the confidence to offer credit to more people, since they have a better understanding of the risk they are taking on.
• Credit rates are lower overall.
  With more credit available, the cost of credit for borrowers decreases. Automated credit processes, including credit scoring, make the credit granting process more efficient and less costly for lenders, who in turn have passed savings on to their customers. And by controlling credit losses using scoring, lenders can make rates lower overall. Mortgage rates are lower in the United States than in Europe, for example, in part because of the information - including credit scores - available to lenders here. Knowing and improving your score can also lead to more favorable interest rates

FICO INFO WEEK: Credit score facts & fallacies

Fallacy: My score determines whether or not I get credit.
Fact: Lenders use a number of facts to make credit decisions, including your FICO® score. Lenders look at information such as the amount of debt you can reasonably handle given your income, your employment history, and your credit history. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low, or decline your request for credit although your score is high.

Fallacy: A poor score will haunt me forever.
Fact: Just the opposite is true. A score is a “snapshot” of your risk at a particular point in time. It changes as new information is added to your bank and credit bureau files. Scores change gradually as you change the way you handle credit. For example, past credit problems impact your score less as time passes. Lenders request a current score when you submit a credit application, so they have the most recent information available. Therefore by taking the time to improve your score, you can qualify for more favorable interest rates.

Fallacy: Credit scoring is unfair to minorities.
Fact: Scoring considers only credit-related information. Factors like gender, race, nationality and marital status are not included. In fact, the Equal Credit Opportunity Act (ECOA) prohibits lenders from considering this type of information when issuing credit. Independent research has been done to make sure that credit scoring is not unfair to minorities or people with little credit history. Scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given score, non-minority and minority applicants are equally likely to pay as agreed.

Fallacy: Credit scoring infringes on my privacy.
Fact: Credit scoring evaluates the same information lenders already look at - the credit bureau report, credit application and/or your bank file. A score is simply a numeric summary of that information. Lenders using scoring sometimes ask for less information - fewer questions on the application form, for example.

Fallacy: My score will drop if I apply for new credit.
Fact: If it does, it probably won't drop much. If you apply for several credit cards within a short period of time, multiple requests for your credit report information (called “inquiries”) will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.

Do's and Don'ts for Building a Solid Credit History

How to start, what to avoid and tips for making the most of your financial decisions. Just as a good employment reference can help further your career, a solid credit history can help you move forward economically. "Even though it is possible to live on cash [alone], most [people] will need a thick and positive credit file to purchase big-ticket items such as a house or a vehicle," says Gail Cunningham, vice president of membership and public relations at the National Foundation for Credit Counseling. "It's important that consumers recognize the impact that a positive credit file can have on [your] financial well-being." While there are many ways to establish a solid credit history, the following tips will help get you started:

Check your credit report 

First, learn about your current financial situation before diving into building credit. The best way to do this is by checking your credit report, which can be obtained for free once a year from each of the three major credit bureaus: Experian, Equifax and TransUnion. "As you build that history, we collect it from your creditors, store it and keep it updated so it is instantly available the moment you need it," says Maxine Sweet, vice president of public education at Experian. Upon a credit lender or bureau's request, credit reports are fed through a mathematical formula created by Fair Isaac Company to create your FICO credit score, which is used by financial institutions across the world to make consumer credit decisions. FICO scores have become the standard for measuring an individual's credit risk and range from 350 to 850, with a higher number representing better credit. "For someone just starting out, it's important that they look at their credit report, verify that there are no mistakes and make sure all the information on that report is accurate because it is that information that is run through the algorithm to generate the score," FICO spokesman Anthony Sprauve says. "If there are mistakes on the credit report, that will impact your credit score."

 
Where to start 

When you are ready to start building credit, experts suggest focusing your attention on one line of credit. Credit cards in particular may be a good starting point. "A credit card is self-managed, and only you can decide how much you are going to charge on it each month and how much you are going to pay on it each month," Sweet says. "It is a strong and predictive indicator of your credit management abilities." Because unsecured credit cards have spending limits determined by your credit history and income, it may be hard to acquire one at first. Secured credit cards require a security deposit that becomes collateral as well as the credit limit for your card and may be an easier place to start, according to an Equifax finance blog. Every card issuer has different standards so research your options to find a card that has a lending profile that fits you best, according to the NFCC. Co-signed cards or loans can be another opportunity for credit beginners to start building a history, but they come with risk. "Whatever happens with that card is going to affect both [parties]," Sweet says. "Just make sure every month you check, and make sure that the agreed payment was made or that the balance isn't getting out of control." If managed closely, co-signed credit can benefit everyone involved, Sweet says.

What to avoid 

"Equally as important as establishing credit is treating it responsibly," Cunningham says. Credit payment history is the most important factor in calculating your credit score, especially in the beginning when every move matters. Paying your bills on time, every time is a great way to help your credit, but it's also important to make sure the balance you are working to pay off doesn't get too high. "Keep the balance at 50 percent or less of your total credit limit for the card," says Trey Loughran, president of Equifax Personal Solutions, a division of the Equifax credit bureau. "But if possible, it's best to pay off the total balance each month, or pay more than the minimum monthly payment required." FICO scores reflect more positively on someone using less of his or her available credit because "if someone is using most of their available credit, that can be an indicator of someone that potentially could have trouble repaying their debt," Sprauve says. Having credit makes it easier to get more credit, but having lots of credit isn't always ideal. "It's a red flag in the FICO algorithm if someone opens a lot of credit at the same time," Sprauve says. "There is a myth out there that 'the more credit I apply for and the more credit I have, the better that is for me,' but it's not true. What can happen is you can look like a bigger risk if you open a lot of credit at once." While FICO scores are factored into 90 percent of credit decisions in the United States, scores are not the only thing lenders take into account, Sprauve says. Keep up with your personal bills to put yourself in the best light for potential lenders. "Things like rental and utility payments are not consistently reported to the credit bureaus, so the FICO score doesn't take those things into account," Sprauve says. "But when applying for a line of credit, each lender will look at different things, and they may take those things into account."

Looking forward 

After some time with your first line of credit, you can consider getting additional credit based on your needs. There's no difference between the type of credit and its impact on your FICO score, but experts say it helps your score over time to have a variety of credit. "The very best credit reports have a mix of credit, so that means it's good to have revolving credit, plus an installment loan, like a car or boat loan," Sweet says. If you miss a payment or two, the best way to rebuild your credit is to pick right back up with the monthly payments. Additionally, the longer ago something happened, the less impact it has on your score. "The point there is that we have all made mistakes," Sprauve says. "As soon as your start those good habits and maintain those good habits going forward, any bad habits or mistakes in the past become less critical." Lastly, once you have a credit-building regime in place, don't forget to check both your credit report and FICO score at least once a year. "Some people believe this type of inquiry can have a negative impact on your credit score, but this is not true," Loughran says. "We actually encourage monitoring of your credit regularly so you clearly understand where your credit stands and also detect any potential signs of identity theft."

A Guide to Credit Scoring Models

You may have several different credit scores. Here's why.

With three credit bureaus – Experian, Equifax and TransUnion – and various rating products, there are many ways to assess your creditworthiness. Your credit score can impact the interest rate you’re offered on a mortgage or car loan, among other areas of your life. Making matters more complicated, though, is the fact that lenders use different scoring models to evaluate your creditworthiness. Here’s a look at how these scoring models vary.

Year Versions 

Scoring models have evolved over time based on consumer behavior. “Going through the mortgage crisis and the economic downturn … Americans’ saving habits changed, and the way they use credit cards changed,” says Rod Griffin, director of public education at the credit bureau Experian. “As people change, scoring models change in order to continue to accurately reflect risk.”

 Different scoring models weigh certain factors more heavily than others. FICO scores are used in 90 percent of lending decisions in the U.S., according to its website. The majority of those lenders use FICO 8, says Anthony Sprauve, senior consumer credit specialist at Fair Isaac Corporation, but some use previous versions. “Just as there are people who are on Windows XP or previous versions of Windows, there are people who for any number of reasons have chosen not to update,” he explains.

FICO recently introduced FICO 9, which will be released to lenders early this year. One notable tweak to FICO 9 is the way it views medical debt that has gone into collections. “It will not penalize that as severely as it did prior,” Sprauve says. “A lot of people find themselves with medical debt that's gone into collections without even knowing they owe the debt due to miscommunication between a provider and insurance companies.”

Credit Bureau Data  

The three credit bureaus – Experian, Equifax and TransUnion – collect data on consumers’ payment histories, collections activities, outstanding balances and other factors that feed into their credit score. “There are three versions of the base FICO score based on the data at the three different credit bureaus,” Sprauve says. “Each bureau has different data, and most of the data is common, but there is some unique data. The base score is optimized to take advantage of the unique data at each bureau.”

In addition to FICO, VantageScore is another credit rating product that factors in unique information from all three bureaus. VantageScore, which was created by the bureaus, has several iterations, such as VantageScoare 2.0 or 3.0. FICO scores range from 300 to 850, while VantageScores range from 501 to 990. Letter grades also accompany VantageScores to help consumers contextualize how they’ll be viewed by lenders, explains Ken Chaplin, senior vice president at credit bureau TransUnion. “It helps guide [consumers] to the sorts of things that they can improve their scores,” he adds.

Types of Lenders 

Credit unions may look at different credit factors than a large financial institution, which means they’ll also calculate scores differently. “Credit unions have a different kind of customer than a large national bank,” Griffin says. “The things that would indicate lending risk for a group of credit union customers may be different from the things that indicate risk for a large bank, so the credit scores used by a credit union are designed to help them predict risk of lending to the customers they serve.”

Industry-Specific Scores 

Lenders can also use an industry-specific score that’s built on a base score and optimized to look at certain areas more closely than others (for instance, past car loans if you’re financing a new vehicle or credit card payments if you’re applying for more plastic). “Lender oftentimes will have a very specific algorithm that they're going to use,” Chaplin says. “Oftentimes they're developed by the bank or card issuer, and those are specific to home, car or credit cards. There literally could be thousands of iterations to determine creditworthiness.” Insurers may also look at your credit history, but typically not your numeric score, since they’re assessing risk, not creditworthiness. “[insurance underwriters] use the data that's found in a credit history with one of the three bureaus to determine a consumer's likelihood to file a claim,” Sprauve says. 

What does this mean for you? 

 While there are many different scoring models, the same principles for improving your credit score apply across the board. “What is far more important than the number itself is understanding what you need to do to make that number better,” Griffin says. “The scores may be different, but risk factors tend to be very consistent from one credit score to the next.” Sprauve boils down credit improvement to three key steps. Pay all your bills on time, because payment history makes up 35 percent of your FICO score. Keep revolving balances low, ideally to 30 percent or less of your available credit, and only open new credit when you need it. “You don't need a lot of different accounts, so don’t be tempted by those credit offers that you get in the mail or when you go to a store,” he says.

IMPROVE YOUR CREDIT IN 2015

If one of your New Year’s resolutions is to improve your credit, there are some helpful ways to achieve this goal. Start your journey to better credit by looking over your credit reports — you have multiple ones.

The Consumer Reports National Research Center found that only 53 percent of respondents in a recent survey had ever gotten their credit reports from one or more of the three major credit bureaus. The Fair Credit Reporting Act mandates that the bureaus — Equifax, TransUnion, and Experian — provide consumers with free copies of their credit files once every 12 months through annualcreditreport.com. The website is the only official online access to your reports, so don’t be fooled by copycat sites. You can also get your reports by telephone or mail. By the way, the every-12-months stipulation is an important distinction. If you pull your files the last day of December, you can’t pull them again for free until the following December, not when the New Year begins. As part of reviewing your reports, you should also pull your credit scores — you have multiple ones, as well.

 Unfortunately, when Congress forced the bureaus to provide free credit reports, it did not include credit scores as part of the legislation. The scores are expressed in three digits, generally starting from 300 and going up to 850 for VantageScore 3.0, the model that is a joint effort by the three major bureaus, and the widely used FICO score. Your credit scores help companies determine how much of a credit risk you might be. The higher the score, the more likely you will pay your debts as promised. But here’s the thing. Many people don’t realize they are not entitled to free credit scores, only their credit reports. You can pay for your scores, starting at about $15 to $21.95 for a single score and up to about $60 for all three scores. Consumer credit scores have become a big business. There are a number of companies that promise consumers access to a free score. However, the deal often comes with a catch: a trial credit monitoring service. Forget to cancel and you’re billed a monthly fee.

Whether you get a free score or pay for one, there’s one thing to keep in mind: There are many variations of credit scores. And the scores that are provided to consumers can vary from those generated by lenders. But this does not mean the lenders buy the new versions. There are also companies that will generate a credit score for educational purposes, selling a score that attempts to approximate a FICO score. More than 80 percent of consumers who obtain a credit score believe that the specific score they receive is what most lenders and other businesses use when determining their creditworthiness or financial stability, according to a survey by the Consumer Reports National Research Center. Despite the variations in scores, if your plan in 2015 is to improve your credit profile, by all means get the free credit scores. Even if they are different from what a creditor pulls, the scores will still give you helpful information about where you stand in general. With the knowledge and tips you’ll find on the sites offering the scores, you can begin to take steps to improve your creditworthiness.