Credit scoring is a complicated process, but it pays to know how it works

The FICO credit score is often touted as the barometer that lenders use to determine whether or not a customer is worthy or receiving credit or a loan. The score, which ranges from 300 on the low end to 850 at the top, is a quick gauge of how well a person has performed financially during their lifetime. A quick glance at the number can give a lender a general idea as to whether a borrower should be offered a loan at a favorable interest rate, a poor interest rate or perhaps not be offered a loan at all.

Much is made of this FICO score in print; it is important that consumers be aware of what it is and what it means, as well as how they can find out their own score. Most people know that they can find out their own credit score by contacting one of the three credit bureaus - Experian, Trans Union or Equifax. These bureaus will gladly sell the consumer a copy of his or her credit report and they will also provide the consumer’s credit score along with it.

What many people may not realize is that determining a credit score is not a unified process. While the FICO score is often used by lenders, each of the three bureaus has a slightly different method of calculating a score and they may or may not use the FICO system. Because of this, the figures offered as a consumer’s “score” may vary slightly. For that reason, it is a good idea for anyone interested in knowing where they stand financially to obtain copies of their reports from each of the three bureaus. A score of over 700 is quite favorable; a score of less than 600 would suggest a spotty credit history. Anyone with such a score might have trouble obtaining a favorable loan.

Here is how the three bureaus use credit scores:

Equifax uses the FICO scoring model. They don’t call it that; they call it “Score Power.” Nevertheless, the system is the same one as that developed by Fair, Isaac and Co.

Experian uses a system they call “PLUS Score” Their system is very similar to the FICO model but uses slightly different factors to generate the figure. 

Trans Union’s system is proprietary; it is a system they have developed themselves for their own use.

It might be difficult to make heads or tails of your standing in the financial world if you were to look at all three numbers at the same time. They should be similar, but almost certainly will not be identical, as each of the bureaus use slightly different models. Nevertheless, it would make good financial sense to check your report with each of the three bureaus at least once a year to make sure that the information contained within them is in agreement. The models they use may be slightly different, but the results are the same - a snapshot of your ability to borrow. It’s important, so check it out.

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