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 may not matter in that particular order, but they are the kinds of numbers that can have significant impacts on your life, especially if you happen to 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? The truth is that credit bureau scores were never meant for the consumer to have to deal with, but the following is some information that may illuminate the subject at least a little bit.
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 entirely on a credit report and varied drastically from one lender to the next. The big problem with the original system is that it was based on a bank officer’s ability to evaluate risk, but without a clear set of rules with clear calculations.
The Fair Isaacs Company developed the first credit scoring system in the 1970s to help minimize inconsistencies in lenders with their own credit systems. The new system became known as the FICO scoring system. The FICO system is based on an algorithm which has been adopted by 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. The scores are different because the information used to derive the scores is different. For example, TransUnion might not have exactly the same information about your credit history as Equifax does, and vice versa. Each bureau might be missing information that helps or hurts your score, and will derive a different score based on the information at hand.
What’s in a number?
Each of the bureaus claims that their score is the most reliable, naturally, but in reality, one particular score may be different from the others, but it is not necessarily any better. You can get a lot farther to understanding discrepancies in your credit scores by comparing information in each reprt and make sure it’s accurate. Disputing erroneous information will help clear up inaccuracies by and give you the best score possible. You may not be an expert at understanding credit scores, but at least you will understand what’s on them.