Buyer beware: Financial companies sometimes cash in on the confusion surrounding credit scores.
In late March, the Consumer Financial Protection Bureau, or CFPB, slapped the credit-rating agency Experian with a $3 million fine for what it says was deceptive marketing of the credit scores it sold. The score Experian sold, called “PLUS Score,” was an educational model and not used by lenders, the CFPB said. But in its marketing, Experian hawked it as the same score lenders use to make decisions about creditworthiness. “If you went out and applied for credit, there was a zero percent chance that they were going to use your PLUS Score,” says credit expert John Ulzheimer, who formerly worked with FICO and Equifax.
This action against Experian — and a similar fining of Equifax and TransUnion in January — reveals just how complicated it is to determine your credit score.
Here’s the truth: You don’t just have one credit score. In fact, you may have dozens of scores — calculated by different companies and for different credit products. Not only is there little guarantee that a score you buy will be the one used by your next credit issuer — even if it is commercially available — but your scores may change every month, depending on your most recent financial behaviors. Scores may also vary depending on which of the three credit-reporting bureaus — Equifax, Experian and TransUnion — supplies your credit history.
Yes, it’s a total “clusterjam,” to put it politely.
Here’s what to know about some of the major iterations of credit scores available — and how to determine your credit health amid all the confusion.
[See: 12 Habits to Help You Take Control of Your Credit.]
FICO Score. When many people envision their credit score, they’re actually picturing Fair Isaac Corporation’s FICO Score. This scoring system has been around since the 1960s and is the “800-pound gorilla in the room” when it comes to credit scoring, says Ben Woolsey, president and general manager at CreditCardForum.com, an interactive forum and credit review site.
Your base FICO Score can range between 300 and 850, with a higher score indicating lower credit risk. According to FICO, its credit scores are used by 90 percent of top lenders to determine credit risk.
To help consumers decode their score, FICO publishes a chart breaking down, by percentage, how each financial data point contributes to your score. For example, payment history makes up 35 percent of your FICO Score while length of credit history makes up 15 percent.
VantageScore: FICO Score may be the most recognized credit-scoring method, but it isn’t the only one.
Another player is VantageScore, introduced in 2006 and developed by the three credit-reporting companies. One difference between the two scoring models? “VantageScore scores many more consumers,” says Jeff Richardson, spokesman for VantageScore. “We’ll score 30 million to 35 million more than a FICO model would.”
VantageScore breaks down its formula by weighting. For example, payment history is “extremely influential” while recent credit behavior is “less influential.” The newest version of VantageScore also uses a scale of 300 to 850.
Differences in these scores. To further confuse things, consumers don’t just have one FICO Score and VantageScore — they have lots and lots of them. Here’s one reason why: Because these companies have redeveloped their scoring formulas over the years (for example, tweaking how medical debt and rental history are counted), there are several different generations of scoring calcluations, and you may not know which generation scoring formula any given lender is using.
[See: 12 Simple Ways to Raise Your Credit Score.]
Proprietary and industry-specific scores. To complicate things even more, remember this: The next credit issuer you apply with may be using its own proprietary model to determine your creditworthiness.
While your credit score from, say, FICO or VantageScore may be one component of the credit-score calculation, credit issuers may use their own formulas or financial data to determine their own version of a credit-risk score. They may cull extra information from your history with them or answers on your credit application.
The industry you work with makes a difference, too. Auto lenders, mortgage issuers and credit card companies may all use different formulations of your credit score, experts say. For example, a lender for an auto loan may look at previous car loans while a credit card issuer may take careful note of your past credit card payments.
[See: What to Do If You’ve Fallen (Way) Behind on Your Credit Card Payments.]
Bottom line. This is just a sampling of the credit scores you have available. But if you’re overwhelmed by options, don’t stress yourself out: The same good financial practices should improve your credit scores across the board. “All these credit scores are going to be directionally similar,” Ulzheimer says, meaning that an excellent score with one credit-scoring company hints at a top-notch number with another company.
So, paying your bills on time, tamping down your credit utilization ratio and only applying for credit when necessary will help you boost your credit score, no matter which calculation your next lender uses.
Occasionally pulling your credit score — or noting it on your credit card billing statement if your issuer supplies it — is a good way to keep your finger on the pulse of your credit health. Better yet, make sure to pull your free credit reports from each of the three credit-reporting bureaus once per year at annualcreditreport.com. From those, you’ll be able to track your payment history, review outstanding debts and report any errors.
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FICO Score, VantageScore, Credit Score: What’s the Difference? originally appeared on usnews.com
