Credit scores and how they came to be:
Prior to the creation of credit scores financial institutions and lenders would often develop their own creditworthiness score to assess the risk of lending to that particular person. This “score” would vary significantly from one lender to the next. The major issue with this innovative method was that it was based solely on the lender’s ability to judge a person’s risk level, rather than a common set of rules, guidelines, and specific calculations or algorithms.
Fair Isaac Corporation (FICO) comes along in 1989 and sets up the first general purpose credit scoring system based on credit bureau information in order to help remove the inherent inconsistencies that arose from having each lender perform their own credit risk analysis. With the new FICO scoring system in place, it would provide a universal and impartial tool for evaluating consumer credit risk. In 1993, FICO introduced specialized credit scores for auto dealerships, credit card companies, mortgage companies, and small business lending agencies.
Equifax, Experian, and TransUnion: credit score systems vary
You are entitled to one free credit report a year from each of the three major credit reporting agencies – Equifax, Experian, and TransUnion. However, if you would have your credit rating or credit score pulled once from each of these three agencies, you would likely find that your credit score differs somewhat among the three agencies. Why is this?
A person’s credit score, or credit ranking, is based upon personal financial information, such as revolving accounts, bills and debts owed, lawsuits and bankruptcies, and other negative and positive incidents. The credit score is calculated by using an algorithm that assigns different weights or points to different aspects of a person’s financial history.
There are three primary reasons why your credit score will vary among Equifax, Experian, and TransUnion. The first and most compelling reason for score variance is that the financial information available to each credit agency differs from day to day. Suppose your TransUnion score was pulled first. One month later, your Experian score was pulled, and the resulting credit score was lower than your TransUnion score. However, you paid the electricity bill late just before your TransUnion score was pulled. Your late payment lowered your credit score, but it did not become a factor until your Experian score was pulled. This accounts for the difference between your scores.
The second and more hotly disputed reason for score variance is the difference in credit ranking calculations between each credit reporting agency. TransUnion, for example, claims that Equifax and Experian all use different algorithms to calculate their credit scores. However, other sources, such as bad-credit-advisor.com, claim that there is no difference in the way FICO algorithms are designed or applied. Bad-credit-advisor.com states that confusion arises because each credit reporting agency calls the algorithm by a different name – but it is the same algorithm. This is always kept a big secret. FICO never releases exactly what makes up their algorithm, and the agencies never reveal how they weigh certain aspects of your credit report to come up with your credit score.
The third and most likely reason for credit score discrepancies has to do with what’s being reported on each agency’s credit report. You might have an error on your Equifax report that is not found on your Experian or TransUnion reports. This is actually a very common mistake and why it’s so important that you check out all of your credit reports on an annual basis, if not on a quarterly basis. This could be the reason why your credit score might differ from each agency.
Just like an individual’s thumbprint, no credit score model is exactly the same. Each credit score model has a slightly different method for weighing credit score factors. The credit bureau can use many different credit score models based on the requirements of different lenders. For example, a mortgage lender may use a different scoring model than an auto lender because they each place importance on different factors. Though your credit scores may vary, they’re all based on information in your credit reports. So focusing on what’s in each of your credit reports could help you build up your credit overall and raise your score.
Other credit scores
While FICO is the most well-known credit scoring system, there are several other versions and providers of credit scores, such as VantageScore, NextGen, BEACON, and EMPIRICA to name just a few. Some scores are directly developed by the three credit bureaus while others are developed by outside companies. Your FICO score will most likely be different than your VantageScore or BEACON score.
It is important to discuss score discrepancies with a trusted financial expert, such as an Advantage CCS certified credit counselor. Small differences can become big discrepancies if your score teeters on the border and you’re literally points away from being denied credit. Your credit counselor can help you figure out why your credit ratings show such variation, and might be able to help you find mistakes on one of your credit reports that might affect your score.
We also offer a Credit Report Review Service for individuals located in Pennsylvania. Your credit report and credit score can affect your ability to purchase a home, rent an apartment, buy or lease a vehicle, find good insurance rates, or even acquire a new job. Let us help you obtain a better understanding of your credit report, credit history, credit score, and show you possible ways to improve your credit worthiness on your own.