Category Archives: Credit Score

Types Of Credit Scores

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A credit score is a number that is assigned to an individual to indicate his creditworthiness. The number is usually contained in a credit report data, which can be obtained for free by one of the major three credit bureaus: Equifax, TransUnion, and Experian.

The three national credit reporting agencies use three scoring models, all of which use the information available at the databases of the agencies.

FICO Scoring Model
FICO is the most commonly used credit score model. The model was developed by the Fair Isaac Company and was the primary credit score method used for many years. The model uses a proprietary formula to “predict” the probability of a borrower repaying his loans based on his past credit information.

In the past, Equifax, TransUnion and Experian used FICO to give consumers their credit scores for a fee. Consumers can also get their FICO scores directly from Fair Isaac Company. Lenders can also request for the FICO scores of potential borrowers from the company.

Vantage Scoring Model
After time, the three credit reporting bureaus decided to come up with their own credit scoring model to compete with FICO. Since the companies already had consumers’ data information on their databases, they decided to develop a join credit score model. This model was marketed as the Vantage credit score. The agencies used both the FICO and Vantage scoring models for some time.

PLUS Scoring model
Fair Isaac Company saw the development of the new scoring model as a violation of anti-trust laws by the credit bureau agencies. In turn, it tool legal action against them. This legal tussle made Experian upset. To get out of the mess, Experian decided to develop its own proprietary scoring model that it named PLUS. In 2009, Experian ceased offering FICO scores to its customers. However, FICO still continues to be the most widely used scoring model and lenders still use it.
The other two credit bureaus, Equifax and TransUnion, followed Experian’s way and came up with their own scoring models named ScorePower and TansRisk score respectively. All the three credit bureaus market their own proprietary credit models together with the Vantage model.

How the Models Work
FICO and the models introduced by Experian, TransUnion and Equifax use proprietary formulas to determine the credit worthiness of a borrower. Since they use different formulas, their scores are different. They also change from time to time depending on a number of market factors and federal reserve actions.

The typical accepted scores for FICO are 350-850, Vantage scores are 501-990 while PLUS scores are 330-830. These credit scoring values are only proprietary and do not affect the chances of a borrower getting a loan. The main thing that lenders look at is the credit history of the borrower that is available in the databases of the credit bureaus.

When you want to apply for a loan, it is important to look for a credit score that the lender is working with. Most lenders still use the FICO score but you may want to ask first before you request for your credit scores.

The Average Credit Score

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The average credit score is a numeric calculation used to decide who gets home loans at what interest rate. If this magic number is high enough, prospective home buyers get to move into their beautiful new home. These lucky buyers have low interest rates making home ownership less expensive. However, if this number is too low, the borrower buys a house with a higher interest rate or a we-are-story letter from the lender. By understanding how the three different credit reporting bureaus work, consumers use this information to increase their credit worthiness and save money.

What Do The 3 Credit Bureaus Use?

There are three credit reporting bureaus in the United States. These are Experian, Equifax and TransUnion. Information about consumers is relayed to one, two or all three of these statistic keeping businesses. This information includes:
• Mortgages
• Automobiles loans
• Credit cards
• Revolving credit like a Sears account
• Installment payments for furniture or appliances
• Collections
• Judgments
• Foreclosures
• Repossessions
• Government liens

Credit Bureaus Use Different Numeric Scores

Each credit bureau records incoming information and issues a numeric score based on the data collected. Although these scores are commonly called FICO, each bureau has its own format, range and name.
Credit Bureau    Score Name    Numeric Range
Experian                 FICO                  330 to 830
Equifax                  Beacon               350 to 850
TransUnion          Emperica             300 to 850

Credit Bureaus Use Different Information

Unfortunately, not all bureaus receive the same information on each borrower. Lenders, credit card companies and other credit issuers may only report consumers’ paying habits to one or two of these bureaus. This difference in information transmitted is one reason credit scores differ from agency to agency.

How Credit Scores Are Calculated

Each reporting agency uses the same formula to analyze consumers paying habits. These are:
• 35%  payment history,
• 30%  credit utilization or the amount of credit used compared to the amount of credit  available
• 15%  the age of credit, a credit card account that is 10 years old is worth more than a one year old credit card,
• 10%  recent credit applications; these remain on the report for two years and
• 10%  the mix of consumer credit with higher points combining mortgage, auto and credit card.

Each financial event in the consumer’s life has an impact on this credit score. On-time payments add points while late payments deduct points. How many points are added or subtracted is a closely guarded secret and one reason for discrepancies between companies. The other has to do with value systems.

Even a 30 day late payment on a FICO score of 680 can drop the score 60 to 80 points while bankruptcy lowers that score 130 to 150 points. A person with a higher FICO would be penalized even more for the same actions. A 30 day late payment may drop the score 90 to 120 points while a bankruptcy would cause this number to plummet 195 to 225 points.

Computing the Average Credit Score

Although many credit issuers only use a score from one company, others like banks and financial institutions get this information from all three credit reporting bureaus. Armed with this data, they either average the three numbers or take the middle amount. For example:

Customer          TransScore  EquifaxScore     ExperianScore     Average    Middle
John                     750                 680                     720                   717          720

If the lender required a score of 720 to get the loan and averaged the three credit scores, John would not qualify. However, if the lender used the middle score which was 720, John would qualify for the loan.

National Average Credit Score

According to a recent report, the national average credit score in January 2011 was 692. People with scores 750 and above are rated excellent. People earning scores between 680 and 750 have a very good rating and qualify for home loans. However, some lenders require borrowers to have scores of at least 720. People with scores below 550 have trouble getting financing for almost anything.

Improving Your Score

There are two ways to improve credit: checking you free credit report once or more per year to make sure they contain only up-to-date and accurate information and handling finances wisely. Many times information on these reports is wrong. Problems include:
• missing accounts
• wrong information on existing accounts including payment status and balances
• paid off accounts are still active
• accounts belonging to someone else
• judgments, foreclosure, repossession or bankruptcy not the consumer’s

Consumers need to inspect all three reports and send a letter to the bureau showing incorrect data. Every individual is allowed one free credit report a year from each of these bureaus. Over time, anyone can improve his or her credit scores by doing the following:
• pay bills on time,
• keep credit card debt to 30% or less of the credit card limit,
• keep older credit card accounts active,
• refuse new credit and
• use different types of credit like automobile or other installment loans, home mortgages and credit card accounts.

These numeric calculations on financial responsibility are important. Whether someone arranging credit uses just one score from Equifax, Experian or TransUnion or collects scores from all of them, higher numbers are better. Most lenders use the average credit score of all three to decide the credit worthiness of the borrower. Although consumers do not have control over how their financial history is analyze and calculated, they can improve this all-important number by paying bills on time, reviewing their reports and handling credit wisely.