5 Major credit scoring models

December 11th 2012

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. In other words, your credit score could cost you a fortune or save thousands of dollars depending how good the score is. 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. The FICO formula and scoring model remains a closely guarded secret to this day.

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.

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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