The topic of credit scores can be more confusing than you might think because of the simple fact that there is no single credit score. Three credit bureaus keep your credit history independently of one another (TransUnion, Experian, and Equifax) and two different companies compute credit scores.
Because there are so many different methods for scoring credit that make up your score, these numerous models will mean that your personal score can range by a number of points. This depends on whose model is being used and what kind of business is requesting it (for example, a bank, an auto dealership, or a department store).
90% of Lenders and Creditors Use the FICO Score
When most people think of a credit score, they are talking about the FICO score. The Fair Isaac Company generates this. Ninety percent of lenders and creditors use FICO scores in their determinations. Yet apart from its main score, FICO has over 50 different variations of your credit score that it makes available to lenders. It means that your score will vary somewhat depending on the company asking for it and what factors were most important to them in determining your score.
As an example, a department store FICO score they generate for you could be a little better than your FICO score sent to a bank deciding on approving you for a car loan. Both of these will be somewhat different from your insurance-based FICO score. All of these will be a little different from your mortgage loan FICO score.
The Less Important Vantage Score
The other main credit scoring company produces Vantage Scores. Vantage was created as an alliance by the three main credit bureaus to try to reconcile differences between the various bureaus and to standardize the results. While Vantage’s prominence has risen since the creation of the company in 2006, their Vantage Score is still less important by far than your FICO score.
All else being equal, you want to have good credit scores generated by both FICO and Vantage Score.
Each of the three principle credit reporting bureaus also generates its own credit scores. These will vary somewhat as some creditors and lenders may not report your credit and payment history to all three bureaus. A lender or creditor can choose to request one or more of these reports to ascertain whether or not to extend you credit or a loan in determining your credit worthiness.
One thing that has made understanding your credit score easier is that Vantage Score adjusted its credit score range to match that of FICO. Your credit score will range from 300 to 850 with either company.
These credit scoring models are created using data from the credit bureaus to analyze your worthiness to receive and ability to manage credit. The agencies choose important characteristics contained in your patterns for paying credit, analyze these, then compute a credit score for you.
How is Your Credit Score Calculated?
They calculate your scores looking at your timeliness of payments, your payment record, numbers and totals of debt, numbers of credit cards that you have, and any credit charge offs.
Different weightings will be assigned to each component in the formula of the model to assign a credit score dependent on this evaluation. This number will range from a possible low of 300 to a highest possible score of 850.
Lenders then employ these credit scores to ascertain the level of risk in issuing you a loan, your loan terms, and its interest rate. With a higher credit score, your loan terms will be more advantageous. You can see why it is important to understand your credit score model and how you can improve this. Next we will look at the two main models that FICO and Vantage Score use so that you can grasp how they judge each component category.