What do you know about Credit Scores?


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Not All Credit Scoring Models Are the Same

That’s right. Many consumers do not realize that there is more than one credit scoring system in the consumer credit industry.
Let’s take a look at why and how they work.

Trans Union, Experian, and Equifax (the Big 3 credit reporting companies) gather credit data from banks, collection agencies, credit card companies, etc. and they create a payment history and activity report based solely from that data. A long time ago, the Big 3 credit reporting companies decided that it would be a good idea to be able to summarize the data they have collected so that a new lender that is reviewing the credit file could quickly tell the likelihood of whether or not that particular consumer is a good credit risk or not. Along comes a company called the Fair Isaac Corporation (FICO) which developed a formula which is designed to analyze the information contained in a credit report and grade each report with a number based on the likelihood of whether or not that credit report is likely to have future delinquencies. More specifically….grade the consumer (based solely on the content of their credit report) on the likelihood of whether or not they will be 60-90 days delinquent on any of their debts within the next two years. The more likely they are to be delinquent….the lower the credit score. The FICO scoring model has a scoring point range of 300 – 850.For many years the FICO credit score was the only credit scoring model used because it was, at the time, the only scoring model available and therefore became the standard scoring system for consumer lending. Whenever a credit report was requested, the Big 3 would pay a percentage of the credit report fee for the service FICO provided to create the credit score. Over time, the Big 3 realized that there were millions and millions of credit reports being requested and so they decided to create their own scoring models so they didn’t have to pay FICO and they could retain the profit. The problem is that no one (not even Trans Union, Experian, and Equifax) knows the secrets of how FICO exactly calculates the data and the formulas they use to create their credit score.

So….they developed their own scoring systems with their own formulas. They all still calculate the likelihood of future delinquency and future risk but the formulas are different for each scoring model. One scoring model might have a score range of 330 – 830 and another of 350 – 850 and another could be from 501 – 990. The problem is that you have to be aware of the scoring model which is calculating your credit score. Remember, the content of your credit can be exactly the same but different scoring models can calculate different scores based on exactly the same information.

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