Credit scoring seems like it should be a straightforward concept. All of the financial information provided to consumers, however, is confusing. You may see multiple scores and various criteria used by banks, credit card companies, and other lenders. What is your real credit score? Read on for an overview of credit scores and what they mean for the general population.
Scoring methods all generally use statistics and analysis to determine consumer credit payments over time. They are all used by lender and financial institutions to facilitate providing credit, loans, and mortgages to individuals. Payment history, overall debt, number of cards, and other information is used in most scoring models.
The History of Credit Scores
Until the 1970s credit scoring systems were not the prescribed way to determine credit viability. Financial institutions used human metrics such as a personal relationship with the client, body language, and initial conversations. The financiers would often share information across the industry when they had mutual clients. Results were often misleading and financial institutions themselves suffered from loss associated with unreliable consumers.
Equifax, now a big 3 credit bureau, paved the way for future credit information collection as the first company operating with the goal of collecting consumer data. TransUnion followed Equifax in the 1960s. Data collection in the 1960s included irrelevant information about personal habits, vices, and opinions. The level of misinformation and distrust by the general population eventually led to the passing of the Fair Credit Reporting Act in 1970, which regulates data collection and circulation of consumer credit information.
FICO (Fair Isaac Corporation) is known as the universal credit scoring method. The three main credit bureaus in the US all use FICO scores in their credit reporting documents. More than 80 countries around the world also use FICO information to improve business processes. FICO helps consumers manage credit health around the world through their analytics and reporting information.
The company was founded in 1956 and now 95% of the United States’ largest financial institutions utilize FICO information in day-to-day business. One hundred billion FICO credit scores have been sold since the company began scoring.
FICO began sharing credit information with businesses in the late 1950s when the company began. In 1987 the FICO scores of individuals became more widely available to lending professionals. It wasn’t until 2003, with the passing of the Fair and Accurate Credit Transactions Act, that credit information was made freely available to consumers once a year.
VantageScore began in 2006 as a collaboration between the three main credit reporting bureaus. Experian, TransUnion, and Equifax developed VantageScore to improve their techniques for analyzing data. The company focuses on accurately providing consumer information in the context of relevant economic data. They are dedicated to finding a solution and standardizing certain consumer data sets across the three bureaus.
The system has been adopted by large financial institutions and lenders as an alternative to FICO. Roughly 10% of the total market uses VantageScore currently. VantageScore “credit report card” is available to consumers for free as of 2013. The consumer market will likely see an increase in the use of VantageScore as a direct competitor of FICO.
Why, if all of this information is regulated and shared throughout the industry, do we receive different scores from each credit reporting agency? The truth is that all of the major credit bureaus – Equifax, TransUnion, and Experian – look at credit information differently. The companies receive your relevant financial information at different times. If a credit card statement hasn’t been paid off when the data is sent to a bureau, your credit score might be impacted by that information.
Financial institutions actually rely on numerous scores to determine their individual criteria for providing credit. FICO, itself, offers more than 50 unique scores. Consumers who receive credit reports only see a selection of information that is determined to be most helpful. These consumer-directed scores are often completely different from the numbers a financial institution will evaluate. They are strictly educational in nature and used to provide consumers with a sense of overall credit worthiness.
Individual companies may also implement their own scoring equations. Ultimately, there may be different scores from FICO, VantageScore, Experian, Equifax, TransUnion, and independent companies. So many numbers floating around makes it difficult for the average consumer to understand which numbers to evaluate for personal finances.
Where to Look
Those looking to get a sense of overall financial standing can look at any of the scoring methods for a reasonable picture. If you are trying to determine how your score will appear to another party, a lender or bank, you may have more difficulty finding accurate information. Ask your lender which scoring method was used for your situation to determine where to find specific numbers associated with a loan or financial inquiry.
Your true, accurate, real credit score will not be found by evaluating one score. The formulas guiding credit scoring vary slightly, giving more or less weight to factors like credit history or outstanding debt. Most of us do not need a 100% accurate credit score. Personal finances and a general understanding of your situation can be attained through any of the major credit scoring companies.
If the credit-scoring methodology is still confusing to you, you’re not alone. The process is full of nuances and statistics that those who are not in the field of finance often find hard to comprehend. Contact credit services and counselors for more information about your unique situation. Consumers sometimes need help determining methods of improving credit scores, as well as contesting inaccurate information that can drive a score down across all scoring models.
Look at credit reports from each of the 3 bureaus at least once a year. Any information that is inaccurate or misleading may need to be addressed by you, the consumer, or a credit repair specialist. Finding a company that specializes in credit law will provide you with peace of mind that your credit score is in the hands of individuals who know what can legally be done to improve your credit score.