New Math: Understanding Credit Scores
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 might not matter in that order, but those are the kind of numbers that can really impact your life, especially if you forget them.
One of the things that makes understanding that Confusion is the norm for people when it comes to credit scores. Credit scores are difficult because there are multiple scores. Which number do creditors give the most weight when evaluating credit? In reality, credit bureau scores weren't meant for the consumers to deal with, but here's some info that will at least make them understandable.
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 on a credit report and varied 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. Scores will differ quite often, which only adds to the confusion.
Why are there several scores and why do the differ?
There are three major credit reporting bureaus: Equifax, Experian, and TransUnion. One reason your scores differ is that not all businesses report everything to all three. Scores are different because the methods by which they are derived are different. For instance, TransUnion may not have the same information as Equifax, 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 bureau claims their score is the most reliable, of course, but realistically they're only different, not 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 errors can clear up innaccuracies and maybe even boost your score. You might not be an expert at understanding credit scores, but you'll understand what's on them.
Tags: Anniversary date, credit score history, credit scores, FICO scoring system