The scoop on credit scores

The scoop on credit scores

This may be a shocker, but that all-important number in the world of borrowing – your credit score – doesn’t really exist, at least not in singular form. Believe it or not, you couldn’t count all your possible credit scores even if you used all your fingers and toes. You could have dozens.

Even so, all credit scoring models share a common purpose: they examine your current and past credit behaviors to predict if you’re likely to pay back money a lender is contemplating loaning to you, whether it’s a car loan, a credit card or a mortgage.  

Your score is calculated by taking the information held at a credit bureau and running it through a scoring model.  

Here’s why you could have so many scores:

  • Different creators  Often, “FICO score” and “credit score” are used synonymously. That’s nice for FICO, the company that created credit scoring, but it’s kind of like calling all soda Coke. 
  • Recently another big player entered the fray: VantageScore. The credit bureaus themselves, in an attempt to tap into the big bucks of credit scoring (and cut what they pay to FICO), created this new form of credit scoring.
  • Different databases  Different information coming in equals different scores coming out. Any of the three credit bureaus could supply the raw data that go into a particular credit score. But not all lenders report the same information to each bureau, so your score may be different based on which database is used.
  • Different purposes  There are different models for different types of lending. There’s a score designed to determine how much of a risk you are in general, but there are also scores for lenders who want to gauge your risk specifically for a car loan, credit card or mortgage.  
  • Different versions  Over the years, credit scoring has gotten more and more sophisticated.  However, some lenders may not want to pay for the latest and greatest scoring version when they’re already using an older (and less expensive) method to calculate your score.  This means they save some money, while you have yet more possible credit scores. 

Despite the potential confusion created by all these different scores, there’s good news. Whether you have 3 or 30, you can be laser-focused in your effort to build or maintain a top-notch score. Do the right things and everything will fall into place, no matter how your score is calculated.

 

J.J. Montanaro is a certified financial planner with USAA, The American Legion’s preferred provider of financial services. Submit questions for him online.