Credit Scores: Understanding a New Math
Understanding your credit score is confusing but worth the effort
Some numbers matter more than others in life. Your cholesterol count, your wedding anniversary date, and your credit score: These are numbers that matter. They may not matter in that particular order, but they are the kinds of numbers that can have significant impacts on your life, especially if you happen to forget them.
One of the things that makes understanding Confusion is the norm for consumers when it comes to understanding credit scores. credit scores difficult is that there are multiple scores. Which number do creditors give the most weight when evaluating credit? The truth is that credit bureau scores were never meant for the consumer to have to deal with, but the following is some information that may illuminate the subject at least a little bit.
A brief history of the standardized credit score
Before the creation of standardized credit scores, lenders and banks used their own systems to evaluate lending risks. These systems were based entirely on a credit report and varied drastically from one lender to the next. The major problem with this original system was that it was based solely on a bank officer’s ability to assess risk rather than a common set of rules with clear and specific calculations.
The Fair Isaacs Company set up the first credit-scoring system during the 1970’s to help minimize the inconsistencies inherent in lenders using their own credit systems. The new system became known as the FICO scoring system. The FICO scoring system is based on an algorithm which has been widely adopted by major credit reporting bureaus. One pervasive question about FICO scores is why each bureau reports a different score. Often, the scores differ by quite a bit, which only adds to the confusion in understanding credit scores.
Why do I have several scores and why do they differ among the credit bureaus?
There are three major credit-reporting bureaus: Equifax, Experian, and TransUnion. One reason your scores differ is that, because of costs, not all business report to all three. The scores are different because the information used to derive the scores is different. For example, TransUnioin might not have exactly the same information about your credit history as Equifax does, and vice versa. Each bureau may be missing information that either helps or hurts your score and will derive a different credit score based on the information at hand.
So, what’s in a number?
Each of the bureaus claims that their score is the most reliable, naturally, but in reality, one particular score may be different from the others, but it is not necessarily any better. You can go a long way toward understanding the discrepancies in your credit scores by comparing the information contained in each report and making sure it is accurate. Disputing erroneous information will help clear up inaccuracies by and give you the best score possible. You may not be an expert at understanding credit scores, but at least you will understand what’s on them.