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Articles » Fico Score | | The Difference between Various Types of Credit Scores |
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To understand the credit scoring system, you must first be aware that your FICO score is not a single score, but many. Fair Isaac and Company, the entity that developed the credit scoring system, provides scoring algorithms to all three credit reporting agencies: Experian, Equifax, and TransUnion. Each of these formulas is different because each bureau uses different information on their credit reports and different algorithms to calculate the actual number. They each also have a number of different scores, some more complex than others.
Equifax has Beacon, Beacon 5.0, Beacon 96, and Pinnacle scores. TransUnion has Empirica, Empirica Auto 95, Precision Score, and Precision 03. Experian offers the Fair Isaac Risk Score. Each of these has been developed to determine the risk of loan default in a specific industry. The three main industries covered are Bank loans such as mortgages, auto loans, and credit cards. Each score can give a lending institution a better idea of whether you are a good risk based on payment performance compared to others who have similar history. Each score has a range between 300 and 850, with the higher scores being the better risks and most likely to receive low interest loans from a lender.
Confused yet? It gets better. In 2006, in an attempt to make scoring between the three agencies more consistent, the credit bureaus developed the VantageScore. VantageScores rate consumers in the range of 501 to 990 and categorizes them into letter categories from A to F. The VantageScore is based solely on credit information inside your credit report. Unlike the FICO scores, VantageScore uses the same algorithms for every credit bureau, so differences in scores are due to differences in the information contained in each report, not in the math itself.
Another scoring system that is sometimes used is called the NextGen Score. Though not as popular as the entrenched FICO formulas, this score is used by some lenders when determining credit worthiness. PLUS scores have also gained in popularity over the past few years. PLUS Scores, or Expansion Scores, take into account factors not generally recorded on your credit report such as checking account performance or payment histories from non-reporting lenders.
So which is the best? It really depends on your own personal situation. Fair Isaac claims that the median score should be 723 but Experian reports that the average credit score they see with the Fair Isaac Risk Score is 678. Does that mean most Americans have bad credit or that the system is broken? The VantageScore is more consistent because the math used for calculating it is uniform with all of the credit reporting agencies. Also, with a growing segment of the population dealing with economic hardship or having no credit history, the PLUS and Expansion scores now in use may portray a more accurate picture. Where exactly do you stand? Research all of them before you visit a lender and understand exactly what your credit worthiness is according to each.
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