Credit scores help lenders gauge a borrower’s likelihood of repaying debt, and because there are thousands of lenders and dozens of loan products, there are all sorts of credit scores.
Although the bounty of credit scores can be confusing, there’s no reason to dwell on point differences among credit scores. It helps to focus on what’s behind the scores, as opposed to the numbers themselves. There are five major components that most credit scoring models examine when looking at your credit reports. You can see what your grade is in each of these categories by using the free Credit Report Card, which can tell you areas of your credit history that may need work, and provides you access to two of your credit scores – one from VantageScore and one from Experian.
The Basics of Credit Scores
The various scoring models have one thing in common: the consumer. Credit reports are a record of an individual’s financial history, and credit scoring formulas are based on the information in those reports. Here’s where variations start to come in: Not all financial information gets reported to every credit bureau, leading to different information among credit reports. As such, a consumer may get different credit scores from the three major credit bureaus (Equifax, Experian and TransUnion), even if the bureaus use the same scoring model.
From that point, the differences compound. Not only does your score depend on which credit report it’s based on, it depends on how the score weighs various components. For example, an auto lender may be more interested in a consumer’s history of repaying loans rather than a credit cards, so the lender would pick a scoring model that puts less weight into a credit card payment history. Some scoring models offer different options based on the lender’s market, or a lender can order a custom formula.
“Lenders, they have choice,” says Jeff Richardson, vice president of public relations at VantageScore Solutions. “That’s important, because they need to have the best predictive capabilities for their businesses.”
With every tweak of the math, a consumer has another credit score, and that turns into a lot of numbers to track.
Picking a Score
There are two main types of credit scores: educational scores and scores lenders use in their decision-making processes. Both can be valuable to a consumer.
“Educational scores — they’re not scores used by lenders to make lending decisions,” said Anthony Sprauve, director of public relations for FICO. “They can give a person a general sense of their credit standing.”
By tracking a single score over an extended period of time, a consumer can gauge the impact of financial decisions and progress toward financial goals. In other words: It’s not a score-to-score comparison that’s helpful, but rather a periodic review of the same scoring model that will provide the best insight into your credit profile.
The important thing is to compare apples to apples — pick a score or two and monitor them frequently to see how your behaviors are impacting your credit.
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