Understanding Credit Score Differences

There are few numbers in life that matter as much to your financial outlook and well-being as your credit score. But which credit score is the right one? The most important? And, for that matter, how come your scores are often different from one reporting agency to the next?

Confusion is the norm for consumers when it comes to this important financial gauge, and the simple truth is that these scores were never meant for the general public to see, but the following should shed some light on the subject.

Prior to the creation of standardized credit scores, lenders and loan officers would often develop their own "score card" to asses the risk of lending to a particular borrower. This score card was based solely on a credit report and could vary drastically from one lender to the next. The major issue with this original method was that it was based on a loan officer's ability to judge risk rather than a common set of rules and specific calculations.

So, in the 1970's, the Fair Isaacs Company set up the first credit scoring system in order to help remove the inherent inconsistencies that arose from having each lender perform their own credit diagnostics. It has since become known as the FICO score and the algorithm has been widely adopted by America's largest credit reporting agencies.

That said, your actual credit score may differ from one reporting agency to the next, which logically brings up the next question. Why?

The three major credit reporting agencies are Equifax, Experian, and TransUnion. The reason that your score may differ from one to the next is dependent on the credit report that each receives and the scoring model they use.

What this means, is that Equifax might not have exactly the same information on you as Experian and vice versa. Equifax may be missing an account that either helps or hinders your score and will therefore report a different final credit score than Experian. If the system was perfect, this wouldn't happen, but since it isn't you want to make sure (if your score is lower than expected from any of these agencies) that they have all of the proper information.

While FICO is the most famous, there are, in fact, several other versions and providers of credit scores. VantageScore, NextGen, BEACON, and EMPIRICA are a few of the other popular sources used in the financial services industry. Some scores are directly developed by credit bureaus while others, like FICO and CreditXpert, are developed by outside companies.

Most alternatives to FICO are still modeled after the same statistical method in terms of the output number, but the major difference for most lenders and other agencies that need to buy credit scores is cost. Companies like FICO charge the reporting agencies a licensing fee for each score generated so the agencies, in turn, have created competing scores in an attempt to provide a lower-cost option to their customers. Basically, the cost savings of buying and using non-FICO scores is tempting to some banks and credit card companies because they need accurate risk assessment of millions of accounts.

In order to protect revenues, credit reporting agencies will often position their scores as the best or most predictive. In reality, all scores must adhere to similar guidelines to be truly predictive, regardless of the final output number. All credit scores are built from the same base set of data and statistical procedures.

Like many products and services in the marketplace, there are a plethora of different options for you (and the businesses that serve you) to choose from, simply because every buyer is different. Based on cost and effectiveness in each buying situation, there are credit scores for sale to satisfy each customer.

Just as a point of reference, it may be important for you to know what the score ranges are for each of the major reporting agencies. While each agency uses internal predictors of certain events (for example: how likely you are to file bankruptcy), the final credit score is not meant as a probability-meter for any specific event. In any case, the higher your score the better, as it is a general gauge of your overall credit worthiness in the eyes of lenders.

• FICO: traditionally between 300 and 850
• Experian: 330 - 830
• Equifax: 300 - 850
• TransUnion: 300 - 850
• VantageScore: 501 - 990 (often assigned a letter grade, A - F)

Note: Because there are now dozens of credit scores that measure many different probabilities, consumers should not be overly concerned with the type of score but rather monitor changes within a single score.

It is also important to note that your credit score is, technically, a continuous variable, which means it can change minute to minute. In reality, scores change when your credit report changes.

While each available credit score is used as a predictor of your credit health, the key point to remember is that all scores are related to each other and are based on the same statistical information. So no score is "best" and you don't need to worry about why one score is different than another.

You also don't need to fret about the "number" of your credit score in relation to anything but itself. That number, at any given time, is merely a snapshot and what's truly important is improving that total. Make your payments on time, avoid over-extending yourself, and steer clear of too many credit accounts, and your score will improve in no time- no matter where that score is coming from.

Update: Check out our new score summary page, which will compare your score to scores nationwide!

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