Scoring thresholds for approvals and better rate offers on loans have become higher while lenders of all kinds depend on scores to evaluate and curb risk making it essential for all of us to understand who creates these scores, where they are offered, and what the variations are.
It is always important to note that there are many scores and each may have a different range. For example, if you pull a FICO score, the range is 300-850 and anything above a 740 is excellent. If you pull a Vantage score, the range is 501-990 and it has letter grades A-F. If your Vantage Score is a 740 it does not mean you have excellent credit.
Most consumers think all scores come from the bureaus which is also false. FICO created the first scores for lenders to evaluate risk. When banks found themselves getting sued for discrimination due to underwriters (bank employees) being the sole authority for rejecting applicants, the demand for a score to use as an indicator of risk became prevalent. This was a way for the focus to come off the banks when consumers were rejected. FICO is and always has been a separate company from Experian, Trans Union, and Equifax. The FICO scores used by lenders are scores created by FICO for the purpose of each bureau to sell to lenders. The bureaus use their FICO version score formula for lenders to evaluate the information the bureau compiled on a specific consumer in the form of a number. The lenders pay a fee to the bureau for this service. Equifax and the other bureaus pay FICO a royalty when using the FICO formula created for them. Equifax, Experian, and Trans Union did not create any FICO scores.
There are many models of the Fico Scores made specifically for Experian, Trans Union, and Equifax and each bureau has separate names for their versions:
- Equifax has Beacon 09, 05, & 96 or you might see these same versions displayed on the report as Beacon 5.0 and 9.0 as well. There is also Pinnacle 1.0 & 2.0 which is Equifax Fico next generation.
- Trans Union Fico scores are called Fico Risk Score Classic 08, 98, or 04. There is also Fico risk score Next Gen. The old name of the Trans Union Fico score was Empirica.
- Experian has the Fico Risk Model 08, V2, V3 and Fico Advanced Risk Score 1.0 & 2.0. Experian use to call its score Fair Isaac Risk Score.
Although some of these scores are outdated they may still be used by banks. You can find the name of the model used to the left, right, or above of the score itself on a merged credit report.
Besides Fico scores, there are hundreds of other scores created by each bureau and sold for many purposes to lenders, insurance companies, credit card companies, landlords, finance companies, telecommunication companies, and much more. There are scores that decipher which consumers might be more likely to default on a mortgage already extended, scores that give insight into which consumers should be offered lower interest plus higher limit credit cards. Some scores even predict those who are more likely to go into strategic default on a mortgage loan. There are even global scores used by large corporations doing business internationally.
Just to give you a glimpse into varied scores here is a list of just a small portion of scores that one of the bureaus offers for sale:
- In the Market Models
- Income Insight
- National Risk Model-National Equivalency Score
- Decision Insight
- Credit Migration Solutions
- Collect Score
- Auto Risk Model
- Bankruptcy Watch
- Retail Risk Score
These are 10 of 100’s of scores offered by bureaus to corporations as a tool to help identify consumers and existing customers that will bring more profits as well as those that will deliver potential loss.
When we think of credit scores, we think of consumer scores used to evaluate risk for mortgages and those that we as consumers buy online. But understanding the vast business of scoring can help us with the big picture. Since we are all being evaluated and watched through these algorithms it helps to get a clearer view of how they work within the corporations that use them.