Not All Scores Are the Same
Many people are under the impression that they only have one credit score. In fact, if you have one credit score, then you likely have many more credit-based scores. For the most part, when a lender refers to your credit score they are talking about your FICO credit score. This is a score based on the Fair Isaac Corporation's credit-scoring model. At the present time, it is the most commonly used score.
When you take on the goal of improving your credit, it is essential that you get a little bit more specific. You need to know which credit score you need to improve. That will depend on your current goal, whether it's buying a house, getting insurance, or landing a job.
Variations on the Theme
While the FICO score is the current gold standard, you most likely have several FICO scores. Each of the three major credit-reporting companies can calculate a FICO score for you, but they also sell their own proprietary scores which are not based on the FICO model, so be careful what you buy. Because the major credit-reporting companies all have different data on you, your fic o credit score will most likely be different at each company. Most experts suggest that you use the middle credit score (not the highest or lowest one) as a gauge of your creditworthiness. Your lenders, on the other hand, might use a different method. They might give you the benefit of the doubt and use your highest score, or they might just buy a single score from one of the credit-reporting companies that they have a relationship with. If you are not sure which score they will use, just ask.
A lot of organizations will offer to sell you a credit score. Before you fork over your hard-earned money, find out what you're getting. Scores from different sources can look deceptively similar, but you need to use the same score that your lender is using if you want to know where you stand.
Other Scores
There are other scores in addition to your multiple FICO credit scores, and any company that you do business with may have its own internal model. The most common internal model might be an application-based model. These models judge your creditworthiness using information you provide on your credit application. For example, your lender may ask how long you have lived at your current address, how much money you make, or how long you have worked at your current job. Of course, lenders won't make a lending decision based solely on your answers to the application. Instead, they use that information as a supplement to the information found in your credit history.
VantageScore
VantageScore is a relatively new scoring model developed by the three major credit-reporting companies: Equifax, TransUnion, and Experian. They suggest that the FICO credit-scoring system is too confusing for consumers. FICO scores range from 300 to 850. A pretty good score is 750, but you might not know that by looking at it. VantageScore uses a scoring system much like your high school teachers', with scores running from 500 to 990. If you remember the good old school days, a 99 percent was an A, anything from 80 percent to 90 percent was a B, and so on. The credit-reporting companies are hoping that this simplicity will help them win market share.
Behavior Scores
The scores described so far are used for a specific purpose, like deciding whether or not to grant you a loan, and at what terms. However, your credit information is used for a variety of other purposes. These stores might use the same credit-file data as your classic FICO credit score, but they analyze the data in a different way. In addition, they might incorporate information from other sources. The goal of these scores is to understand other parts of your behavior.
Profitability Scores
One of these scoring models is designed to determine how receptive you might be to new offers from your credit card company. If you are more likely to accept a given offer, the company is more willing to splurge and mail you an advertisement. Somehow, the way you use products and accounts can reveal how likely you would be to say yes.
Other scoring models help your creditors predict how profitable you will be as a customer. They get an idea of how much revenue you will generate, and they can predict how likely you are to switch brands. Presumably, they make attractive offers to customers who are less likely to switch, and they might create incentives (or penalties) to retain customers who are likely to switch.
Bankruptcy Scores
Creditors can even score you on the likelihood that you will declare bankruptcy. Not surprisingly, your credit history is a main ingredient to the score. A bankruptcy score is slightly different than your FICO credit score. The FICO score attempts to rank you based on the likelihood that you'll be ninety days late on any bill with any creditor. The bankruptcy score goes even further: it tries to determine whether or not you will declare bankruptcy and default on all of your debts.
Expanding the Reach
The FICO scoring model can only generate a credit score for you if you have a sufficient credit history. If you have not used credit accounts enough (perhaps because you are young or a new arrival to the country), there will not be enough data in your credit history to generate a score. In the past, individuals without a score had a hard time getting credit. However, Fair Isaac has remedied this situation in recent years. They created a score they call the Expansion credit score. This score judges your creditworthiness based on information from alternative sources. They examine your past for evidence of bounced checks, delinquencies with service providers, and other behaviors that might describe your creditworthiness.
The best thing you can do for yourself is be a responsible consumer. Pay your bills on time, and don't bounce checks. If you get in over your head, your credit scores will follow. A lot of different organizations check into your credit, so just do a good job and make it easy on yourself.
If your credit history is not sufficient to generate a FICO credit score, then you may be able to get credit because of the Expansion credit score. Once you get your foot in the door with lenders, you are building up your credit history. Over time, there will be enough information about you in the major credit-reporting company databases. As a result, they will be able to generate a FICO credit score on you eventually.
Insurance Scores
Insurers look at your FICO credit score to determine whether or not you are an attractive customer. In addition, there are specially designed insurance scores that help them further evaluate you. Based on your ranking, insurers may decide that they do not want you as a customer, or they might offer you coverage at higher-than-normal rates. The reverse is also true: if you score well, insurers may offer you a discount.
