A recent study by NerdWallet revealed that most Americans need to learn more about the fundamentals of credit scoring. Most Americans are oblivious about the quantity of credit scores being utilized by the credit industry today. With FICO scores alone, the most widely-used credit scores in the country, a consumer can have as much as 65 different FICO credit scores. On the other hand, aside from FICO scores, there are also other credit scoring algorithms that are competitors, which are being used by credit grantors such as PLUS Score, VantageScore, & others, which we will discuss further.
First of all, we must be familiar with the meaning of a credit score. So, what is a credit score exactly? As provided by Equifax, “a credit score is a rating used by a lender to help determine whether or not you qualify for a particular credit card, loan, or service. The credit reporting agencies apply an in-depth mathematical model (called an “algorithm”) to the information in your credit file to yield your credit score.” Actually, a credit score is used to gauge how likely a consumer is to become 90 days late on an existing account.
According to myFICO.com, the FICO scores created by Fair Isaac Corporation about 25 years ago are the ones extensively used by 90% of top lenders in the U.S today. It is an indispensable tool when it comes to credit decision-making, which is worth billions every year. The PLUS Score was built by Experian and is only intended to be an “educational credit scoring model” not actually utilized by lenders. Its purpose is to give insight about credit competency of consumers. Meanwhile, CreditXpert credit score simply explains the factors that can affect the credit quality of the consumer. The VantageScore was created in 2006 by the three major credit bureaus, Equifax, Experian and TransUnion. Their purpose was to rival against FICO to be more systematic and also to assist lenders inclined to sub-prime markets (individuals who have a credit score of below 680 thus a tendency of higher interest on loans).
Following the FICO scores, the VantageScore is considered as the second most commonly-used credit score when it comes to lending decisions. Aside from using your credit score, lenders will also check other details, which are not relevant to your credit scores, like employment history, income, social media, and other information. As a whole, borrowers who possess a high credit score have a much better chance of receiving more favorable terms.
Credit bureaus have their own way of collecting, updating, and storing data of consumers information. myFico.com states that there can still be score differences even with the data of different credit bureaus are all identical, because “each of the bureau’s FICO scoring system was designed to optimize the predictive value of their unique data.” In addition, Yahoo Finance provided that although such lenders and collection agencies submit the data to the three credit bureaus, the creditors may not report to all the credit bureaus resulting to the inconsistency of scores.
Meanwhile, proprietary scoring formulas or algorithms need to be updated constantly by their respective developers. As emphasized by myFico.com, the importance of redeveloping or updating their scoring formula is to keep abreast with the changes in the credit landscape and to ensure that it will remain as an “intuitive predictor of credit risk”. In addition, the updated scoring model, which utilizes the latest analytic technology, reflects the ever changing behavior of consumers when it comes to credit and modified to the current enhancement on data reporting.
At the moment, the latest version of FICO scores is FICO 9; however, the most commonly used version is FICO 8, which was unveiled in 2009, with the scores ranging from 300 to 850. In comparison, VantageScore has a counterpart for FICO 9, which is the 3.0 version introduced in 2013 and also has a scoring range of 300 to 850. In monitoring your credit score, always make sure that you are using the same brand and version of the lender that you are going to apply to. As clearly explained by Yahoo Finance, a difference of 10 to 30 points between credit bureaus is fine. However, when the credit scores vary 50 points or more, then a consumer should take steps to find out which of the credit bureaus are reporting different information.
According to Financial Samurai, FICO created unique scoring calculations to every type of lending industry such as auto loans, bankcards, mortgages, installment loans, and others. FICO’s general scoring system provided distinctive versions to each of the major credit bureaus. Based on the data from Bankrate.com, the following values are tabulated.
With FICO alone, there are already an estimated 65 different types of credit scores and this number will continue to rise as newer versions are released. As mentioned earlier, most of these scores are within the scale of 300 to 850; however, there are few that ranges from 250 to 900, which include the auto scores and bankcard scores.
Now that you have learned about the different types of credit scores, we can now raise the question, which of these scores are the most important? Yahoo Finance pointed out that the FICO scores are still on top of the pyramid. On the other hand, John Ulzheimer of Ulzheimer Group claims that lenders may still check different scoring models. “It’s time well-spent to monitor both your FICO and VantageScore from all three credit bureaus so you’re covering 100% of the market,” explained Ulzheimer.
Consumers should make it a habit to check their credit reports approximately once a month seeing that identity theft is the most common crime in American and that data security is also at high risk of being compromised. This way, consumers can be proactive in protecting their credit from others.