Credit Scores, a confusing mess

What is your credit score?

You actually have more than one credit score. Credit scores are calculated based on the information in each of your credit reports. Companies that you have an account with may not report credit related information to all 3 of the credit reporting bureaus

The information that each of the 3 credit reporting bureaus is different and the formulas or algorithms used to calculate your credit scores are different. Therefore your credit score from each of the companies will be different.

To further complicate matters lenders also use slightly different credit scores for different types of loans such as a mortgage, credit card or an auto loan.

Why is it important to know your credit score?

Lenders pull information from your credit reports, like your bill-paying history, how long is your credit history, outstanding credit balances and collection actions. The total number of points — a credit score — helps predict the likelihood that you’ll repay a loan and make payments on time.

Which credit score is the most used by financial institutions?

A report by the federal government’s Consumer Financial Protection Bureau estimates that scores developed by Fair Isaac Corporation (FICO) accounted for over 90% of the market of scores sold to firms in 2010 for use in credit-related decisions.

There are numerous FICO scoring models that vary by version (e.g., newer and older models), by the nationwide credit reporting bureau that sells the score to lenders, and by industry.

FICO offers industry-specific models for credit cards, mortgages, auto loans, and utilities. FICO models typically generate credit scores in the range between 300 and 850. FICO also builds custom models that are designed for specific companies’ credit underwriting needs.

Just when you think it can’t get more confusing. The following Ad was taken from the MyFico.com for their Ultimate 3B product.

“Quarterly access to a new 3-bureau credit report and 28 FICO® Scores”

“Get a more complete look at your credit than ever before. Every three months you’ll get access to your new 3-bureau credit report and 28 FICO® Scores— including the 19 FICO® Scores most widely used in mortgage, auto and credit card lending, and the newly released FICO® Score 9.”

“View your FICO® Score 8 (the FICO Score version most widely used by lenders) and your FICO® Score 9 (the newest FICO Score version) for each credit bureau. Plus, view 22 additional FICO Score versions: 9 FICO Score versions used in auto lending, 10 FICO Score versions used in credit card lending and 3 FICO Score versions often used in mortgage lending. That’s insight into your credit profile you can’t get anywhere else.”

9-17-2016 1:58 PM  –  http://www.myfico.com/Products/FICO-Ultimate-3B/

Which credit bureau issued your credit score?

Each of the nationwide credit reporting bureaus – Equifax, TransUnion, and Experian – have their own proprietary scoring models or algorithms to predict credit performance

These models were originally developed for use by lenders to predict performance on credit obligations, but are now primarily sold as educational scores to consumers. These scores typically resemble FICO scores in range. Some of the proprietary generic scores sold by the credit reporting bureaus are:

Equifax: “Equifax Credit Score.” Produces scores in the range 280-850.

Experian: “Experian Plus Score.” Produces scores in the range 330-830.

TransUnion: “TransRisk New Account Score.” Produces scores in the range 300-850.

VantageScore LLC, a score development company established as a joint venture of Equifax, TransUnion, and Experian, licenses its scoring models for sale by the three nationwide credit reporting bureaus to both creditors and consumers. The VantageScore models produce scores in the range of 501-990.

So, what credit score should you buy?

The nationwide credit reporting bureaus generally sell consumers educational scores or VantageScore scores. These scores may be similar to the FICO score but each is derived from a different algorithm and from different credit report information and reported on a different scale.

You can obtain credit scores by subscribing to credit monitoring services. These are typically educational scores. Some educational credit scoring providers make scores available to consumers for free. Free meaning that they will recover their costs through advertising, credit card offers or other means.

Even if you purchase a FICO score and go to a creditor that uses FICO scores, the score may not be the one that your creditor uses, given the diversity of scores in the marketplace and the possibility that the creditor may obtain scores from a different credit reporting bureau.

How can you get the credit score you really need?

Go to the horse’s mouth, so to speak. Contact the prospective lender and ask questions.

First, ask the prospective lender what specific credit score they will use to determine the amount, term length and interest rate to grant you the credit. Make sure that you are given the name of the credit reporting bureau that the lender uses.

Second, purchase the same credit score from the same credit reporting bureau that the lender uses.

The cost for the correct single credit score is usually less than the monthly credit score reporting service charges. One time 3 bureau scores are usually available for less than the yearly subscription price.

Now you are ready to get serious about negotiating for that financial transaction, be it a mortgage, auto loan, credit card or personal credit line. This is the time, if your scores and reports are not up to your needs, that you seek the info required to make them better.

Summary:

Credit scores are not a simple matter, mainly because there is no such thing as a single number nor is there a national standard. Everything depends on which credit reporting bureau, which scoring algorithm and what the lender wants as the number for determining loan terms.

Everything depends on the wants or needs of your lender.

 

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