What is my REAL credit score?

Dear Credit Mama,

I've been working hard to pay all of my bills on time and have almost paid off my credit cards. I want to see if my efforts have made my credit score go up. I've looked into buying my credit score online, but it's confusing because different companies have different ranges for what your credit score could be – some have scores that go to 850, some go to 990. What's the deal? And which one should I believe?

--Angie, St. Louis, MO



Dear Angie,

Very astute of you to notice this! You are right – not all credit scores are the same.

The "FICO" score was invented by Minneapolis-based Fair Isaac Corp. in 1988 as an attempt to quantify the odds that borrowers will repay loans on time. The company’s name is derived from those of Bill Fair and Earl Isaac, an engineer and a mathematician, who created the credit scoring concept and founded Fair Isaac in the 1950s.

FICO scores range from 300-850. FICO calculates your score using the following factors:

• 35% payment history
• 30% amount owed
• 10% tpes of credit in use
• 15% length of credit history
• 10% new credit

"Vantage" scores, dubbed "FAKO" scores, were developed by the three credit bureaus and introduced in 2006 to compete with FICO scores. Because they do not have the actual FICO formula (a secret as closely guarded as Coca Cola's recipe), they are only approximations of the FICO score.

Vantage credit scores range from 501-990. Each 100-point interval corresponds to a letter grade, in ascending order. A score of 501 to 600, for example, would translate into a grade of "F", while someone with a score greater than 900 would receive an "A." Vantage calculates your score using the following factors:

• 32% payment history
• 23% utilization of available credit
• 15% credit balances
• 13% length and depth of credit history
• 10% recently opened credit accounts
• 7% available credit

FICO Vs. FAKO

Consumers usually buy their credit scores from the credit bureaus – the VantageScore. However, Fair Isaac states that most lenders (90% of the 100 largest banks) use the FICO score. (To complicate matters, some lenders create their own variation on a FICO score, adding in their own criteria.) Your "FAKO" scores can differ from your FICO scores by as much as 50 points.

More than two-thirds of all consumers qualify for a grade of "C" or higher. FICO scores, by contrast, range from 300 to 850, with 85 percent of Americans coming in at higher than 600. If you found a score of higher than 850 then you are "buying" one of the other scores - not the FICO score that lenders use.

Fair Isaac has filed a federal antitrust lawsuit against the nation's three credit bureaus, alleging they are "misleading and confusing consumers" when selling their own version of the credit score. They contend that since Equifax, Experian and TransUnion own the consumer data it uses to create the FICO scores, they could "unfairly manipulate the credit score price, sales and distribution process" to promote VantageScore.

The bureaus claim that the new scoring model increases competition, giving more choices to credit grantors and consumers.

Having more scoring options is good for lenders, but not necessarily good for consumers. With multiple scoring models, the odds increase that a lender can find a score to use to declare you a subprime candidate and increase your rates.

If you are trying to qualify for a mortgage or other major loan, you will want to access the real FICO, not the FAKO. Our friends at mycreditroadmap.com can link to you a FICO credit reporting product that will give you reports and scores for each of the three national credit bureaus.

It's Good to Have Limits

A couple of years ago, Federal Reserve researchers reviewed 310,000 individual consumer credit files. Among their findings: nearly half (46%) were missing at least one credit limit on their report.

For anyone who is concerned about improving or maintaining their credit score, this is bad news... because when companies like Capital One do not report credit limits to the credit reporting agencies (Equifax, Experian and TransUnion), your credit score can drop significantly.

The first question: How does this happen?

Part of your credit score -- 30% -- is determined by how you use your credit. If you tend to maintain balances at or close to your credit limit, your score will not be as high.

Credit reporting agencies use special software to calculate your credit utilization ratios. Credit utilization refers to how much of your available credit you are using. If a company does NOT report your card limit, the software may substitute your highest balance in place of your actual limit to calculate your ratio.

So, for example, if you have a credit card with a $5,000 credit limit, and the highest monthly balance you've ever had on the card is $2,500, you have a 50% utilization ratio. However, if your most recent balance is $2,000, and the credit card company doesn't report your $5,000 limit, the scoring software may use the highest monthly balance ($2,500) to determine your limit. That would make it appear as though you are nearly maxxed out with a credit utilization ratio of 80% - which could drop your score 20 to 50 points or more.

Recent data from Experian revealed that those with the highest credit scores used only, on average, 17.8% of their available credit.

The next question - Why do companies withhold credit limits?

The answer: Competition and the almighty dollar.

With the average American carrying four credit cards with balances of $9,000-$13,000, it's becoming increasingly difficult for lenders to gain new customers. As a result, they are trying to lure existing cardholders with offers of low balance transfers, cash rebates and more.

Companies like Capital One hope to reduce "poaching" of customers by their competitors, who routinely sift through national credit bureau data looking for prospective customers. The practice of withholding credit limits artificially lowers the credit scores of their customers, theoretically making them less attractive to other lenders. And it might mean that consumers using Capital One cards are paying higher interest rates on their other credit accounts. This makes it more likely that you will remain a captive customer of Capital One and less likely to be offered the credit you deserve from other companies.

Those hurt the most by this practice are consumers with few credit accounts and those just beginning to build their credit history.

Class action lawsuits have been initiated, accusing the Big Three of deliberately shielding data despite knowing that this practice reflects negatively on credit score calculations.

Until the lawsuit is settled, consumers would be wise to review their credit files to see which companies are not reporting accurate credit limit data, and to be cautious about using these cards.

Put a Freeze on Identity Thieves

Earlier this year, the parent company of TJ Maxx disclosed that information from nearly 46 million credit and debit cards was stolen by hackers - the biggest data breach in history. The stolen information covers transactions dating as far back as December 2002.

The company, which also owns Marshall's and other stores in the U.S. and U.K., revealed that an additional 455,000 customers who returned merchandise without their receipts also had their personal data stolen, including driver's license numbers.

Identity theft is one of the world's fastest growing crimes. A report issued in March by Gartner banking security analyst Avivah Litan estimates 15 million Americans will become victims of identity theft in 2007, up 50% from 2005. Average loss: $3,257 in 2006, up from $1,408 in 2005. With new state laws now requiring the reporting of data breaches, more than 500 incidents of such losses have been reported since February 2005 - losses involving more than 155 million records.

Fifteen percent of identity theft cases involve the opening of new accounts. Criminals use stolen information to open credit card and cell phone accounts, take out loans, and pay medical bills. The victims are left with a corrupted credit history that can take years to correct - and suffer with higher interest rates until their files are cleared.

Consumer advocates and even state governments have been advocating for greater consumer protection in the form of a credit "freeze." Put simply, a freeze prevents the credit bureaus (Experian, Equifax and TransUnion) from releasing your credit report to lenders. Because few lenders will issue credit without this information, it is a good deterrent.

Not surprisingly, this did not sit well with the bureaus, whose core business is making money by selling credit report data. The Big Three issue billions of credit reports each year, amounting to a combined annual revenue of more than $4 billion.

The Center for Responsive Politics reports that the Consumer Data Industry Association (which serves the interests of the credit bureaus) spent $1.4 million on federal lobbying in 2006, trying to fight consumer-ordered freezes and working hard to convince politicians that identity theft wasn't as big an issue as people thought. (Tell THAT to anyone who shopped at TJ Maxx!)

With growing pressure on legislators to enact consumer protection laws, TransUnion decided to offer a file freeze in all 50 states and D.C. this past October. The other two bureaus soon followed.

All three credit bureaus must be contacted for a full credit freeze. Costs are typically free for identity theft victims, and generally $10 or less for non-victims (depending on the state) each time you "freeze" or "unfreeze". This does mean that you will have to unfreeze your file each time you wish to apply for credit - but the increased protection from identity thieves is often worth it.