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A Multitude of Credit Scores






Economic Commentary

Your Credit Score Is a Ranking, Not a Score

Yuliya Demyanyk

With credit scores affecting so many important aspects of our lives, it’s no wonder that people are concerned with improving their scores. Once they start to pay attention to them, though, consumers often find their scores changing in unpredictable ways. Knowing that your score is not a rating of your creditworthiness but a measure of where your creditworthiness ranks relative to everyone else is the first step in understanding your score and how to manage it.

Credit scores are used in nearly every part of our lives, from applications for car loans, mortgages, credit cards, and car insurance to even some hiring decisions. It is well established that people with higher scores get better loans, have better jobs, and pay lower insurance premiums than people with lower scores. Because credit scores matter so much, many consumers regularly monitor their scores, and some try to improve them. But when people start paying closer attention, they are often puzzled by how and why their scores change over time.

Credit scores can be hard to figure out. They can change even when one’s behavior has not. Or the same exact credit score can qualify a borrower for a loan one year but not be high enough the next. Part of the apparent unpredictability comes from the common misunderstanding that a credit score is a rating of one’s creditworthiness. Actually, it is a ranking of one’s creditworthiness compared to the rest of the population in the United States at any point in time. In other words, your score depends not only on your credit behavior but also on the behavior of others. If your score changes over time, it means your rank-order among other consumers has changed.

Knowing more about who produces credit scores and how they are calculated can help consumers understand, interpret, and manage their scores.

A Multitude of Credit Scores

The first models of credit scoring were developed by the Fair Isaac Corporation more than 50 years ago. The scores produced by the models, FICO scores, were named after the company and are well-known today. Since then, more than a hundred different models and scores have been developed for and used by lenders, insurance companies, employers, and utility providers.

Credit scores in the United States are now calculated by the Fair Isaac Corporation and a number of other companies—the three major credit bureaus (TransUnion, Equifax, and Experian), other independent firms, and lenders themselves. In general, the calculation involves analyzing consumers’ past and current behavior with respect to their credit obligations. Each company produces its own types of scores, and there are many types of scores for different purposes. For example, there are credit scores designed for specific kinds of lending, such as auto loans, mortgages, and credit cards. There are credit scores for insurance products, for utility services, for cell phone service, and more. Most consumers, however, are familiar with only one type of credit score, the “consumer score, ” which is provided by the three major credit bureaus.

Though the three credit bureaus produce credit scores for the same purpose, the scores themselves are not the same. Differences are partially driven by the fact that the bureaus may have different information reported to them by lenders and financial companies. The differences can also trace to differences in the models used by each of the credit bureaus, which arise as the companies compete for business and try to distinguish themselves with scores that predict consumers’ riskiness more accurately.

Recently, the three credit bureaus joined forces and created a new company called VantageScore Solutions, LLC. Their goal was to develop credit scores for consumers that are the same across the three credit bureaus. The scores they produce, VantageScores, are not distributed by the combined company; rather, each credit bureau markets and distributes them to lenders and consumers.

What Credit Scores Mean (and What They Don’t)

The exact formula for each type of score is kept secret by every organization that produces one, just like the exact formula for Coca-Cola is a trade secret. However, we know the main ingredients of some credit scores, since they were released to the public by Fair Isaac and VantageScore Solutions. As an example, table 1 lists the factors that enter the FICO formula. Factors that enter VantageScores are similar; they can be found in the testimony of VantageScore’s president, Barrett Burns, to the House of Representatives in 2010.


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