Credit Scoring Models

What is a credit score, and how is your score calculated? There is so much misinformation and confusion, so let’s shine some light in the dark matter of credit scores.

The first important step to understand is that the 3 big credit reporting agencies do exactly that. They report your credit payment history. Ever since these agencies came into existence, subscribers with authorization from a consumer could request information on credit you have been granted, and how you have paid it back. Reporting your credit card balances, minimum payments, and payment history are distinct and separate from credit scores.

The original credit score we know today as the FICO score was invented in 1956 by an engineer (William Fair) and a mathematician (Earl Isaac). Their Fair Isaac & Co. scoring system is a numerical representation prognosticating the likelihood of you doing something in the future. If you notice, that description says nothing of money and payments. The FICO is like the crystal ball that tells your fortune in many different aspects of your life.

Depending on the industry of the subscriber (the people pulling your credit), your credit score will be different than that for another industry. FICO tailors a specific credit scoring model for many industries. There’s one for us in the mortgage industry, another for auto sales. There’s insurance risk scores, bankruptcy scores, even a medication adherence score!

These various types of scoring systems are called scoring models. Every industry is looking for something different from your payment history and balances. These scoring models supposedly forecast your future performance. The credit “score” is a numerical representation of that likelihood. Obviously the higher the score, the more likely you will pay your bills. To compound the confusion factor, all these scoring models have different ranges of scores. For being an engineer and a mathematician, why the inventors didn’t use a score of 1-1000 befuddles me. Mortgage scores run from 350-850. Auto scores run from 250-900.

When people talk about their FICO score, they should really be talking about their credit score. Each of the 3 credit reporting agencies have their own system to generate the score based on the data in their system. Equifax uses a service called “Equifax-Beacon 5.0”. Experian uses the “Fair-Isaac” scoring model, and Transunion’s is called “FICO-Risk-Score-Classic”. You guessed it, 3 companies, and 3 scores. That is why in the mortgage industry we pull from all 3. We throw out the high and low, and use the middle one. And I know you are wondering, no, there doesn’t seem to be a pattern showing one of the companies is always highest or the lowest.

Now to really confuse the public, we have companies like CreditKarma and MyFreeCreditReport, and others all providing you your credit score. It seems that all the credit cards I have now allow me access to my credit score every month. The score you get from these services is different! A consumer credit score matches none of the modeling described earlier.

Should you even review your consumer credit report if the score means nothing? Remember, your score and your payment history are two different things. You should review your credit report to make sure there’s no fraudulent accounts. You should also review to make sure you weren’t reported for having late payments when you paid things on time. As for the score you get, I would like to say it is close to what we see on your mortgage credit report, but so many times I have seen score deviations of 50 points or more.