As of July 2020, the average American’s FICO credit score was 711. However, the same year, the average VantageScore was 688. This may seem like a large difference. But how does it occur?
While people usually talk about their credit score as one number, the fact is it’s not. People actually have many credit scores. They can vary between each of the credit bureaus and based on other factors. We’re diving in to why this happens and how it affects your financial life.
Why Is a Credit Score Important?
A credit score is meant to be a measure of credit-worthiness. Creditors want to see if you’re likely to pay back your debts. A credit score can make it easy for them to see if you are risky or not.
It can affect whether you’ll be approved or denied for financial products, including credit cards, loans, mortgages, and even renting an apartment. You may be able to obtain lower interest rates with a higher score. That can help you save a lot of money.
The range for the most commonly used credit scores is 300-850. You want to aim as high as possible. If you are considering a big purchase such as a home or auto, you need to pay close attention to your credit score.
How Are Credit Scores Calculated?
In the US, there are three major credit reporting agencies, also known as credit bureaus. Each of these bureaus collects information about your financial life. They then compile it into a credit report.
The bureaus get their information based on what creditors report to them. Some creditors do not report information to all of the bureaus, perhaps only one or two of them.
In addition, the bureaus may also gather information from public records. This might include your addresses, employment history, or court activity, including foreclosures and repossessions.
As a result, your credit report from each of the bureaus may look different. The information in these reports is then used as the data for credit score calculations. Even if two bureaus use the same credit score model, they may end up with different scores.
Credit Score Models
There is not just one way to calculate your credit score – there are dozens. There are different models and even different versions of each model.
The original FICO score was created by the Fair Isaac Corporation in 1989 as the first general-purpose credit score. It is now the most widely used model, used by 90% of lenders for decisions.
FICO uses a predictive scoring system that makes the scores similar across the bureaus. However, they still may not be exactly the same as different information present in the reports can change the calculations.
FICO now offers 28 different scores, each focused on different lending decisions, including credit cards, mortgages, and auto loans. The FICO Score 8 is the model most commonly used for general purpose decisions. Your FICO score weighs five factors at different levels:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New Credit 10%
VantageScore was created collaboratively by TransUnion, Experian, and Equifax. It was meant to be more accurate than other models. VantageScore 4.0 was recently created, but 3.0 is still commonly used.
4.0 takes information about rent and telecom and utility payments into account as well. This helps create scores for people who may not have accurate scores or access to credit.
VantageScore weighs credit information a little differently than FICO, focusing on influencing labels instead of percentage-based weights:
- Total credit usage, balance, and available credit: extremely influential
- Credit mix and experience: highly influential
- Payment history: moderately influential
- Age of credit history: less influential
- New accounts: less influential
Lenders could choose to use any one of these various models or even a combination. For example, a landlord may choose to use TransUnion. Or a mortgage lender could use an average of two, perhaps FICO and VantageScore.
Why Are Credit Scores Different Between the Credit Bureaus?
The sheer number of different scoring models alone means that everyone has multiple different credit scores. FICO and VantageScore both use the same factors in calculating the score. But, because they weigh them differently, the formulas are different. This leads to different scores.
Each bureau might have different information on its report. Even if they have the same information, they may record, display, or store the information differently. Added to this, if they receive information at different times, your credit score may also be different.
A credit score is calculated at a specific point in time. It’s a snapshot of your financial risk, not the full picture. This means that if the information in your report changes, scores calculated at different times could lead to different scores.
Misinformation and incomplete files can lead to big differences in your scores. Sometimes name changes lead to fractured reports. In the same way, applying as two different names, ex. James vs Jim can lead to the information not being found for the same person.
Finally, incorrect data can lead to potentially large differences. Sometimes, someone else’s data is reported on your report. Or, the wrong numbers could be used. It’s extremely important to correct mistakes like these so they don’t negatively impact your credit score.
How to Improve Your Credit Score
Because each of your credit scores can vary, it’s not necessary to focus on any one score. Instead, it is important to focus on your overall credit health in order to improve all of your credit scores.
One of the first things you should do is check your credit report for mistakes and to see where you stand. You can check each of the three credit bureaus for free once a year. It may be helpful to even stagger the checks throughout the year.
If you find any errors, you can file a dispute with the bureau online or by mail. You may also want to consider learning how to legally remove debt if there is negative history on your report.
This is also a great time to discuss credit repair options with a credit consultant. They can help you create a plan to improve your credit score. Credit restoration will put you in a good position for when major life events occur.
Make a Plan to Improve Your Credit Score
Your credit score can vary between credit bureaus for a variety of reasons, including different information in your reports and different scoring models.
It’s important that your overall credit is healthy. Contact the credit consultants at Elevation Outsourcing to make a plan to improve your credit today.