Credit Score Types and Versions
Credit scores are used by most lenders and credit card providers to assess the creditworthiness of credit applicants, to determine whether credit should be extended to them, and if so, at what interest rate. Higher credit scores usually result in lower interest rates for the borrower and under better terms. All credit scores are based on statistical analysis of data, and most credit scores use the data in credit reports, which are compiled by the 3 major credit reporting agencies. Other sources of information may include payment history for rent, utilities, and other regularly recurring bills.
Lenders choose the credit score that they want to use, and there are 2 major factors that determine their choice: cost and the predictive value of the credit score, especially in regard to the probability that a borrower will default. The primary credit score used by most lenders is the FICO credit score, because it is deemed best at predicting future creditworthiness. Other providers of credit scores offer lower rates for the lenders or use other information to assess borrowers who do not have much of a credit history. The main competition to the FICO score is the VantageScore, which was developed by the 3 major credit reporting agencies — TransUnion, Experian, and Equifax — who also provide the data for calculating the FICO score.
The primary purpose of credit scores is to predict future creditworthiness by looking at past creditworthiness, under the assumption that the past prognosticates the future, so the major credit scores use the same type of information, specifically: payment history, amount of debt, length of credit history, the total credit available to the borrower, the amount of credit that the borrower has recently obtained, and the number of times that the borrower has recently sought credit, called credit inquiries. Credit scores differ by how much weight they give to each factor.
How credit scores are used and how they predict future creditworthiness is detailed in Credit Scores. This article describes the different types of major credit scores issued by the different companies and some of their versions, and how they differ. Note that many of the details of these credit scores will continually change, but they will continue to to rely on the same basic information, since it is based on commonsense, to a large extent. Also, some nominal scores were based on a major credit scoring algorithm, usually FICO, but were marketed under different names as an attempt to distinguish themselves in the marketplace. For instance, Experian used the FICO algorithm to calculate their Beacon score, and TransUnion also used the FICO algorithm to calculate their Emperica score. Both of these scores had slightly different ranges, neither had any real advantages over the FICO score on which they were based, and neither is used by these credit reporting agencies anymore.
FICO Credit Scores
Although there are innumerable ways of calculating credit scores, the most important — important because most credit grantors use these scores — are calculated using the software of FICO, previously named Fair Isaac Corporation, (NYSE:FIC), called the Classic FICO credit score, which has been in use since 1989. Although FICO has developed newer scoring models, the Classic FICO is still the most commonly used score in the lending industry. Your FICO scores are based only on credit information in your credit report and this information is gathered from various sources, but mainly from lenders who lend money or extend credit to you, such as credit card companies and banks. The 3 main repositories of this information are the credit reporting agencies (CRAs) TransUnion, Experian (LON:EXPN), and Equifax (NYSE:EFX). Each CRA also has their own name for the Classic FICO score, and have collaborated to create a new scoring model called VantageScore.
Note that the credit reporting agencies calculate your credit score based on the information in their files — FICO Corporation only supplies the algorithm to calculate the score.
The use of credit reports and their derivative credit scores, however calculated, is predicated on a simple principle — that past and current creditworthiness is predictive of future creditworthiness.
The FICO score is not perfect at measuring creditworthiness or predicting future credit behavior, since neither can ever be measured precisely, but because most lenders use the FICO score, this increases its importance both in determining whether you will get credit or not, and how much you will pay for it. The FICO score ranges from 300 to 850 — higher scores indicate greater creditworthiness. The median FICO score in the United States is 723. The 3 major credit reporting agencies all issue FICO scores based on the information in their credit files.
Because the FICO score from each credit reporting agency is based on the information in their own files, and because these files have slightly different information in them on each person, the FICO score will also differ from the 3 agencies, which is why many lenders get 2 or 3 scores. If the lender gets 2 scores, generally the lower one will be used in determining whether to give the consumer a loan or at what interest rate it will charge. When 3 scores are obtained, generally the middle score is used.
To add to the confusion of different credit scores, many lenders use older versions of the FICO score. Moreover, there are specific types of FICO scores for specific types of credit, including the FICO auto score, mortgage score, installment loan score, insurance score, and a personal finance score. The specific scores differ primarily in the weight that they assign to the different rating factors in the credit file. For instance, the personal finance score weighs the consumer's use of finance companies more heavily. Generally, these scores will usually be within 20 points, higher or lower, of the generic FICO score that consumers typically receive.
FICO Expansion Score
According to FICO Corporation, Â¼ of all adults in the United States — about 50,000,000 people — either lack a credit report or have insufficient information in their credit reports to determine a reliable credit score. These people include immigrants, young adults, the recently divorced or widowed, and ethnic groups that typically do not use credit.
To better gauge the creditworthiness of these individuals, FICO has sought additional information from sources other than credit reports to compute a more reliable score. Because this score is based on different sources of information and computed differently, it has a new name — the FICO Expansion score.
The FICO Expansion score measures consumer risk based on credit data outside of credit reports, such as deposit account records, pay day loan cashing, and purchase payment plan performance. The FICO Expansion score attempts to measure the likelihood that the consumer will become severely delinquent (more than 90 days past due) in his payments, for up to 24 months after scoring. Like the Classic FICO score, the Expansion score ranges from 300 – 850, with higher numbers indicating greater creditworthiness.
Fair Isaac Credit Services is a subsidiary of FICO Corporation that organizes this information into consumer files; produces the reports and risk scores for business clients; and resolves consumer disputes. The new scores will be available through myFICO.com. Call 1-866-838-3427 for answers to any questions.
FICO has introduced a new credit score in 2009, called FICO 8, which gives greater negative weight to credit card balances that are near the credit limit, but ignores so-called nuisance collection accounts where the original balance is less than $100, such as for library fines. The treatment of late payments is also changed: isolated late payments will have a lesser negative impact than previously, but the negative impact of more late payments will be greater than under previous scores. Other FICO 8 changes:
- a serious credit event, such as a repossession or charge-off, will not lower the score as much as previously if you are still current on other credit accounts
- a more positive weighting for having both revolving and installment accounts
- a greater negative weighting for fewer open active accounts
Beginning in the fall 2014, FICO is changing the way the FICO score is calculated based on unpaid medical bills and late payments that were later paid or settled. Unpaid medical bills, which account for more than half of consumer debts that are in collection, will have a lesser effect on the credit score than they did previously. Previously, late payments had a negative effect on the credit score, whether they were paid or not, although unpaid bills under $100 were not counted. So people with a median score of 711 that had bills that were paid late or were settled may receive a score 25 points higher under the new scoring algorithm. However, if the medical bills are eventually paid or settled, then FICO scores may increase significantly. VantageScore also ignores bills that went into collection if they were eventually paid or settled. Keep in mind that not every lender uses the latest scores. Many lenders still use the older scores, especially since both Freddie Mac and Fannie Mae are still using the old scoring methods to determine whether they will accept mortgages from lenders.
Historical Note: How Does the NextGen FICO Score Differ from Classic FICO?
The NextGen FICO score was another score developed by FICO before FICO 8, but has now been replaced with FICO 8 and 9. The NextGen FICO 2.0 score ranged from 150 to 950 and generally gave a higher score to many people by:
- not considering collection items of less than $100, such as unpaid parking tickets or library fines, for instance;
- by not counting accounts at finance companies as a negative item;
- by lengthening the time period in which multiple inquiries for auto loans or mortgages are treated as 1 inquiry from 14 days to 45 days;
- by dividing consumers into 18 groups instead of the 10 in Classic FICO, which ranges from those who have declared bankruptcy to those who are never late on payments. Presumably, more groups allows a better classification of credit risks.
- And by giving more weight to newer credit files. For instance, a new credit file less than 6 months old is not considered in the Classic FICO, whereas, the NextGen model considers any credit file over 3 months old. For instance, if you open your 1st credit card account, and you have no other accounts, then that account will not affect your FICO score for at least 6 months, because not enough information is present in your credit file for a reliable FICO score. NextGen FICO will include the information after 3 months. However, once your credit file has been established for the necessary time, then any new accounts that are opened will have an immediate effect on your score. For instance, if you have had a credit card for at least 6 months, and you open another credit line, then the new credit line will have an immediate effect on both your FICO and NextGen FICO scores.
57% of consumers have a higher NextGen score than a Classic FICO, while the rest have a lower score.
FICO also places different people into different groups known as scorecards, which group people according to their creditworthiness. This is done because the same behavior can be treated differently or scored differently according to the scorecard that the consumer is in. Thus, opening up several lines of credit within a short time would be seen as a much higher risk for someone in a low scorecard compared to someone in the highest scorecards. The FICO score used by most lenders has 10 scorecards, with 2 of the scorecards for people with significant credit problems. FICO 8 has 12 scorecards, 4 assigned to people with significant credit problems; FICO 9 uses 13 scorecards.
New Credit Scores Not Based on Credit Files: FICO Score XD and CreditVision Link
Generally, lending to less creditworthy individuals is more profitable, since higher interest rates and other fees can be charged, which more than makes up for any write-offs. FICO, in conjunction with Equifax, has developed a new score, called the FICO Score XD, which uses information in cell phone and cable accounts provided by Equifax and on property records and other public data provided by LexisNexis Risk Solutions. Another score developed by TransUnion, called the CreditVision Link, relies on data from payday loans, checking account histories, frequency of home address changes, as well as the size of monthly payments and whether the payments are increasing or decreasing while the loan is outstanding. The credit score range for both the FICO Score XD and CreditVision Link will be the same as for the FICO score, 300 to 850, with higher scores indicating a better credit risk. As of October 2015, the FICO Score XD is still being tested by lenders, but is expected to be more widely available in 2016. When it is available, consumers can obtain a free copy of the FICO Score XD from either Equifax or LexisNexis, but FICO has not decided whether to include FICO XD scores in their open access program that allows lenders, such as Discover or American Express, to give free FICO scores to their consumers. Consumers who are scored with CreditVision Link will be able to obtain the score as part of their TransUnion credit report.
A new credit scoring system, called VantageScore, has been developed by Equifax, Experian and TransUnion, now in its 3rd revision. VantageScore is touted to provide a more consistent scoring system for creditors, giving creditors an alternative to the FICO score. There will still be some differences among the scores of the 3 agencies because each credit agency has slightly different data in their files on each person, but the methods used to compute the score will now be the same for all 3 agencies.
VantageScore 3.0 does not count paid collections and it looks further back in history, back to 24 months instead of the 6 months considered by FICO, where at least 1 account had to be updated within the previous 6 months. Besides a payment history from lenders, VantageScore 3.0 also uses payment history for rent, utilities, and phone bills, allowing many more people to be scored. Thus, a score can be generated for someone with a credit history as short as 30 days instead of the 6 months required by the FICO score. Additionally, VantageScore merges current information with consumer credit behavior in both 2009-2011 and from 2010-2012, to better evaluate how the consumer did under different economic conditions.
VantageScore also offers a website — https://reasoncode.org/ — where the consumer can enter the 2 digits found either in a VantageScore report or disclosure notice received after applying for credit that explains why the score was not higher. After applying for credit, consumers will receive 4 or 5 reasons as to why their credit score was not higher, with the reasons listed in order of priority, so the 1st listed item will have the greatest impact on the score, and the 2nd listed item will have the 2nd most significant influence on the score, and so on. Because lenders are required to disclose the reasons for denying credit or giving less favorable terms, VantageScore is offering this website as a means of better informing consumers about why their score was not higher. Note that a consumer may receive these codes even if credit was approved at favorable terms, since there will always be a reason why the score is not 850. Only people who actually have a score of 850, which would be highly unusual, would not receive any reasons.
Although VantageScore is being used by more lenders, most lenders still use some version of the FICO score. Many lenders have standardized on the FICO score, and may well continue to use that, especially since the FICO score has been around for a while, and has a track record of predicting the future creditworthiness of the loan or credit applicant. Another reason why the FICO score may be difficult to supplant is that many banks and mortgage companies sell their mortgages in the secondary mortgage market, which generally requires pooling the mortgages, which in turn, requires gauging the risk of these mortgages. Using a new scoring system that has not been extensively tested as to how well it actually measures risk would introduce uncertainty in the secondary mortgage markets. Thus, those companies that want to sell their mortgages in the secondary market, which is most of them, might well be reluctant to use anything other than the FICO score to assess risk. As of late 2015, Fannie Mae and Freddie Mac, who purchase most of the mortgages in the secondary market, still require lenders to use the older Classic FICO score.