G. Credit Score

Credit Scores

When you apply for credit, whether for a credit card, a car loan, or a mortgage, lenders want to know what risk they’d take by loaning money to you.  FICO® scores are the credit scores most lenders use to determine your credit risk. You have three FICO scores, one for each of the three credit bureaus: Experian, TransUnion, and Equifax.  Each score is based on information the credit bureau keeps on file about you. As this information changes, your credit scores tend to change as well. Your 3 FICO scores affect both how much and what loan terms (interest rate, etc.) lenders will offer you at any given time.  Taking steps to improve your FICO scores can help you qualify for better rates from lenders.

FICO scores

Fair Isaac Corporation (FICO) is a public company that provides analytics and decision making services including credit scoring intended to help financial services companies make complex, high-volume decisions.  FICO was founded in 1956 as Fair, Isaac and Company by engineer Bill Fair and mathematician Earl Isaac.  FICO was first headquartered in San Rafael, CA, United States.

Credit bureau scores are often called “FICO scores” because most credit bureau scores used in the U.S. are produced from software developed by Fair Isaac and Company.  FICO scores are provided to lenders by the major credit reporting agencies.

FICO scores provide the best guide to future risk based solely on credit report data.  The higher the credit score, the lower the risk. But no score says whether a specific individual will be a “good” or “bad” customer.  And while many lenders use FICO scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product.  There is no single “cutoff score” used by all lenders and there are many additional factors that lenders use to determine your actual interest rates. However you can now see what interest rates lenders typically offer consumers based on FICO score ranges.

Other Scores

FICO-like scores have different names at each of the credit reporting agencies.  All of these scores, however, are developed using the similar methods as Fair Isaac, and have been rigorously tested to ensure they provide the most accurate picture of credit risk possible using credit report data.

Credit Reporting Agency	FICO Score
Equifax	BEACON® Score
Experian	Experian/Fair Isaac Risk Model
TransUnion	EMPIRICA®

More than one credit score

In general, when people talk about “your score”, they’re talking about your current FICO score.  However, there is no one credit score used to make decisions about you. This is true because:

• Credit bureau scores are not the only scores used.
  Many lenders use their own credit scores, which often will include the FICO score as well as other information about you.  
• FICO scores are not the only credit bureau scores.
  There are other credit bureau scores, although FICO scores are by far the most commonly used.  Other credit bureau scores may evaluate your credit report differently than FICO scores, and in some cases a higher score may mean more risk, not less risk as with FICO scores.  
• Your credit score may be different at each of the main credit reporting agencies.
  The FICO score from each credit reporting agency considers only the data in your credit report at that agency.  If your current scores from the credit reporting agencies are different, it’s probably because the information those agencies have on you differs.  
• Your FICO score changes over time.
  As your data changes at the credit reporting agency, so will any new credit score based on your credit report.  So your FICO score from a month ago is probably not the same score a lender would get from the credit reporting agency today.  

Free credit reports, not including the scores, can be obtained annually at www.annualcreditreports.com .  Adding the scores costs $8-10 each but they are important to know so get all three.

Credit repair

An overwhelming majority of individuals have mistakes on their credit reports.  You have the right to challenge ANY entry on your credit report, even the valid ones.  It is the lenders obligation to verify the debt (if it is valid) within a thirty (30) day period or the bureau is required to remove the entry.  Bettering you credit score can earn you access to loans, better rates and better insurance.

Scoring for insurance

Scores are used not just to rate your credit worthiness for loan decisions but also your insurability.  For years now insurance companies have been pulling credit scores to assess how you would be as an insurance customer.  If you have financial issues you may be more inclined to falsify or exaggerate claims. Plus, there is that assessment of your ability and willingness to pay premiums on time.

Scoring for banks

Also note, banks have their own scoring system so if you have problems at one bank don’t think you are merely going to go down the block and open an account with another bank.