A Guide to Credit Scoring Models

You may have several different credit scores. Here's why.

With three credit bureaus – Experian, Equifax and TransUnion – and various rating products, there are many ways to assess your creditworthiness. Your credit score can impact the interest rate you’re offered on a mortgage or car loan, among other areas of your life. Making matters more complicated, though, is the fact that lenders use different scoring models to evaluate your creditworthiness. Here’s a look at how these scoring models vary.

Year Versions 

Scoring models have evolved over time based on consumer behavior. “Going through the mortgage crisis and the economic downturn … Americans’ saving habits changed, and the way they use credit cards changed,” says Rod Griffin, director of public education at the credit bureau Experian. “As people change, scoring models change in order to continue to accurately reflect risk.”

 Different scoring models weigh certain factors more heavily than others. FICO scores are used in 90 percent of lending decisions in the U.S., according to its website. The majority of those lenders use FICO 8, says Anthony Sprauve, senior consumer credit specialist at Fair Isaac Corporation, but some use previous versions. “Just as there are people who are on Windows XP or previous versions of Windows, there are people who for any number of reasons have chosen not to update,” he explains.

FICO recently introduced FICO 9, which will be released to lenders early this year. One notable tweak to FICO 9 is the way it views medical debt that has gone into collections. “It will not penalize that as severely as it did prior,” Sprauve says. “A lot of people find themselves with medical debt that's gone into collections without even knowing they owe the debt due to miscommunication between a provider and insurance companies.”

Credit Bureau Data  

The three credit bureaus – Experian, Equifax and TransUnion – collect data on consumers’ payment histories, collections activities, outstanding balances and other factors that feed into their credit score. “There are three versions of the base FICO score based on the data at the three different credit bureaus,” Sprauve says. “Each bureau has different data, and most of the data is common, but there is some unique data. The base score is optimized to take advantage of the unique data at each bureau.”

In addition to FICO, VantageScore is another credit rating product that factors in unique information from all three bureaus. VantageScore, which was created by the bureaus, has several iterations, such as VantageScoare 2.0 or 3.0. FICO scores range from 300 to 850, while VantageScores range from 501 to 990. Letter grades also accompany VantageScores to help consumers contextualize how they’ll be viewed by lenders, explains Ken Chaplin, senior vice president at credit bureau TransUnion. “It helps guide [consumers] to the sorts of things that they can improve their scores,” he adds.

Types of Lenders 

Credit unions may look at different credit factors than a large financial institution, which means they’ll also calculate scores differently. “Credit unions have a different kind of customer than a large national bank,” Griffin says. “The things that would indicate lending risk for a group of credit union customers may be different from the things that indicate risk for a large bank, so the credit scores used by a credit union are designed to help them predict risk of lending to the customers they serve.”

Industry-Specific Scores 

Lenders can also use an industry-specific score that’s built on a base score and optimized to look at certain areas more closely than others (for instance, past car loans if you’re financing a new vehicle or credit card payments if you’re applying for more plastic). “Lender oftentimes will have a very specific algorithm that they're going to use,” Chaplin says. “Oftentimes they're developed by the bank or card issuer, and those are specific to home, car or credit cards. There literally could be thousands of iterations to determine creditworthiness.” Insurers may also look at your credit history, but typically not your numeric score, since they’re assessing risk, not creditworthiness. “[insurance underwriters] use the data that's found in a credit history with one of the three bureaus to determine a consumer's likelihood to file a claim,” Sprauve says. 

What does this mean for you? 

 While there are many different scoring models, the same principles for improving your credit score apply across the board. “What is far more important than the number itself is understanding what you need to do to make that number better,” Griffin says. “The scores may be different, but risk factors tend to be very consistent from one credit score to the next.” Sprauve boils down credit improvement to three key steps. Pay all your bills on time, because payment history makes up 35 percent of your FICO score. Keep revolving balances low, ideally to 30 percent or less of your available credit, and only open new credit when you need it. “You don't need a lot of different accounts, so don’t be tempted by those credit offers that you get in the mail or when you go to a store,” he says.