Most people are aware that they have a personal credit score, but might not realize that there’s no universal, across-the-board credit score that will be issued by all providers. In other words, different credit scoring companies might give you a different score, depending on a number of factors.
Here’s what you need to know about the biggest credit bureaus used by banks, how their criteria differs, and the reason why you may have a different credit score depending on the reporting company.
What is a Credit Bureau?
A company that provides information about the fiscal history of individuals, credit bureaus provide banks, credit unions, financial institutions, and investors with a look into a person’s financial stability and standing.
Credit bureaus, which are also known as credit reporting agencies, compile data about people’s financial choices and, according to an algorithm or calculation that varies from bureau to bureau, assign a numerical score to a person’s credit standing that correlates with risk.
Your credit score gives a lender insight into whether it’s advantageous for them to provide you with financing. For example, if you have a track record of not paying back what you owe, that will be reflected in your credit score and a lender can then make the choice not to approve your application.
If an individual has a history of paying their bills on time, has borrowed money and repaid the funds within the designated time frame, and has demonstrated additional good financial practices, they will be given a high credit score. People who have a shakier financial history, including legal judgements against them for finance related matters, such as bankruptcies and liens, will have a lower credit score.
How are Credit Scores Calculated?
While individual credit bureaus will use their own criteria and assign different levels of importance to information, the following factors will be considered when determining your credit score:
- Payment history — Do you typically pay your bills on time, or are you racking up debts without being able to repay them?
- Credit utilization — At the end of each billing period, are you maxing out your credit cards or lines of credit, or do you have available credit still available?
- Current debts — How much do you owe towards your credit cards and/or loans?
- Age/length of your credit history — The older and longer your credit history, the better. Having a track record of responsible borrowing will boost your credit score; being a new borrower with little borrowing history will hurt it.
- Diversity of your credit accounts — Having an array of different types of credit in your name, such as a home loan or mortgage, alongside traditional or retail credit cards, is scored higher than simply having one type of credit.
- Legal action — If you’ve gone bankrupt, had liens placed against your home or business, have defaulted on a loan and faced collections or legal consequences because of that, this will reflect negatively on your score.
- Recent credit activity — Some credit bureaus will view a flurry of recent activity, such as applying for multiple loans or opening multiple new credit accounts, as a cause for concern.
What are the Most Common Credit Scores Used by Lenders?
Major personal credit score providers include Experian, Equifax, and TransUnion. These companies are among the most frequently sought by lenders in order to learn more about an applicant, and these scores are used as a significant factor when making the determination whether to lend to a potential borrower or not.
What is a FICO Score?
The Fair Isaac Corporation (FICO) is a credit scoring and financial analytics company that uses a proprietary formula for calculating credit scores. FICO pulls extensive data from numerous credit report databases to determine their scores.
According to the FICO website, the most critical factor in gauging a consumers’ score is their payment history – meaning whether or not they pay their bills on time, and consistently.
If an individual opens multiple lines of credit or credit cards within a short time frame, will result in a lower FICO score.
FICO Score vs. Credit Score
The FICO score is slightly different from a traditional credit score due to the fact that FICO takes a wider range of information into account when determining a score. Because it is widely believed to be the most comprehensive and extensive report of creditworthiness in today’s landscape, lenders take a FICO score extremely seriously when weighing whether or not to grant funding to an applicant.
90% of top lenders, including the world’s biggest banks and financial institutions, use FICO in their decision making processes. Many banks and financial institutions have a hard FICO requirement, which means that they won’t lend to anybody who falls under that number.
Both Experian and Equifax, the two largest credit bureaus in the U.S., use FICO as the basis for their credit scores. FICO scores range from 300 to 850, with scores above 781 considered stellar.
TransUnion Credit Score
TransUnion is a major consumer credit reporting agency that calculates consumer credit scores, based on a mathematical model called VantageScore 3.0. The scoring range begins at 300, which is considered poor, and goes up to 850. According to TransUnion, a score higher than 781 is deemed excellent.
How do These Credit Scores Differ from Each Other?
Essentially, all of these credit scores provide the same thing: an overview for lenders and investors to understand your business’ financial standing and a rough estimate of the risk involved with lending to you.
However, the way that your score is calculated, the breadth of data considered, and how much each factor matters, differ by agency.
For example, FICO considers a slew of new credit requests in a relatively short amount of time to be a bad thing, and this will be reflected in your score. But, conversely, VantageScore ranks the importance of new accounts to be very low, and this hardly influences your score.
FICO ranks your payment history as the single most important factor when it comes to your score, with it making up some 35% of the final calculation, whereas VantageScore weighs your average credit utilization, balance, and available credit as the top priority for determining your score.
Because of these differences, you may find that you have a different credit score, depending on the agency that’s providing it! Banks and financial institutions are aware of this reality, and may use different scores depending on which specific financial product you’re requesting.
Another important thing to bear in mind is that not all credit bureaus pull data from the same sources, and not all credit companies report to all the bureaus. This means that some agencies might be getting only a partial, incomplete view of your current standing when they calculate your score.
In order to gain the best possible understanding of your score, you should request your Experian, Equifax, TransUnion and FICO scores, and compare and contrast them so you can figure out what might be slipping through the cracks.
At the end of the day, your lender will use the credit score that they feel is most applicable to your particular request. For example, if you’ve applied for a loan, FICO will likely be used because it’s perceived as being the score that best reflects the risk of whether or not you’ll default.
No matter what credit reporting agency is issuing your score, a long-term pattern of responsible fiscal behavior will reflect positively in your score. That means consistently paying your bills in full as well as borrowing amounts that you can realistically pay back on time. These solid steps can help you achieve a stellar credit score, no matter what reporting agency is calculating it.
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