Thursday, March 7, 2013
5 Major credit scoring models
Credit
scores are one of the most important components of a consumer’s personal
finances. It dictates the quality of the loan you would be eligible for as well
as the interest rate which will be tacked on to the borrowed principal.
Potential lenders and creditors base their decision to grant or deny you a line
of credit based on your credit score.
Developed
in 1970, the Fair Isaac Corporation introduced a method to measure the
‘creditworthiness’ of an individual. It took into account multiple factors like
the length of an individual’s credit history, recent ‘hard’ enquiries, credit
usage ratio, etc. while calculating the score.
In
the years following the formal adoption of the FICO scoring system by businesses
and lenders all over the nation, a handful of consumer and credit analytics
company developed their own credit score formulas and scoring models. Currently,
there are 5 different types of credit score formulas (including the FICO
formula) in circulation, each with varying characteristics. This has caused much
confusion within the consumer community.
Here
is an analysis of the major scoring formulas.
The
FICO score
This is the most widely adopted credit score and scoring model in the industry. The Fair Isaac Corporation is the father of the FICO score and is the originator of the credit report concept. Credit reports are generated by the three leading credit reporting agencies (CRA), namely, Experian, TransUnion and Equifax. Since every creditor doesn’t report to all of the 3 credit reporting agencies, FICO scores generally happen to vary from CRA to CRA. Sometimes, the score point deviation can be as much as by 80 points. The FICO score scale runs from 300 to 850 points.
This is the most widely adopted credit score and scoring model in the industry. The Fair Isaac Corporation is the father of the FICO score and is the originator of the credit report concept. Credit reports are generated by the three leading credit reporting agencies (CRA), namely, Experian, TransUnion and Equifax. Since every creditor doesn’t report to all of the 3 credit reporting agencies, FICO scores generally happen to vary from CRA to CRA. Sometimes, the score point deviation can be as much as by 80 points. The FICO score scale runs from 300 to 850 points.
The
PLUS score
PLUS
is an acronym for Plan, Live, Understand, Succeed and this particular scoring
model was developed by Experian. The formula and the score calculation system
was developed solely keeping consumers in mind. Unlike the FICO score scale, the
PLUS score ranges between 330 and 830. The Experian PLUS score is not the same
as the Experian ScoreX PLUS which is not available to consumers.
The
VantageScore
This
particular scoring model was developed in 2006 as a joint venture between the
top 3 credit reporting agencies. The scoring model had been developed to compete
with the FICO model and scoring system but failed to catch on. Very rarely do
lenders and financial institutions use this particular scoring system. One of
the major advantages of the VantageScore model is that the score gaps between
reports generated by all the 3 major CRAs are significantly smaller since the
scoring model and the underlying computational algorithm used by the 3 CRAs are
the same. The VantageScore scale ranges from 501 to 990.
There
are two more scoring systems which are little known and rarely used by
consumers. These are:
TransUnion
TransRisk Account Credit Score
The
proprietary scoring model was developed by TransUnion and free credit score
providers like Credit Karma are known to use it. TransRisk offers separate
scores for home and auto loan accounts. Their scoring scale ranges from 300 and
900 while home and auto credit score scale ranges between 150 and
950.
Equifax
Score Power
This
particular score is not based on a different scoring model. Rather, it is the
name Equifax uses for the FICO based score that appears on the credit reports
generated by Equifax.
One
of the more important things to note is that the score varies according to the
scoring model used for the calculation. Therefore a FICO score of 750 is in no
way comparable to a PLUS score of 750. Other than these 5 scoring models there
are a few others which use different parameters to calculate credit scores
although most lenders refrain from using them.
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