How Come My Credit Scores Are All Different?

Credit scores have been used in the United States since 1956, when engineer Bill Fair and mathematician Earl Isaac created a formula to determine whether a person was a good credit risk, according to Alexis Leondis of the Bloomberg financial website. These scores are now widely used by banks, finance companies, insurers and other companies to make important decisions about your credit worthiness when you seek loans or insurance policies. There are several different versions.

Definition

Your credit score is a three-digit number that tells creditors how likely you are to fall behind on your bills within the next two years. The score comes from information in your Experian, Equifax and TransUnion credit reports, coupled with a comparison to other consumers from similar financial backgrounds. The MyFICO scoring website explains that credit report factors include payment history, owed debt, credit limits and the ages of your accounts.

Differences

While Fair Isaac Corp. (FICO) originated credit scores, each credit bureau now has its own variation on the FICO formula, according to Pat Curry of Bankrate.com. Experian calls its version the Experian/Fair Isaac Risk Model, while Equifax uses the BEACON score and TransUnion uses the EMPIRICA score. Each credit bureau collects material independently for its credit reports, so they may be slightly different, which is what causes variance in their scores. Their formulas have minor differences, which also makes the numbers vary, according to Curry. Lenders consider the differences when evaluating your scores in response to a credit application.

Standardization

The Vantage Score is a standardized credit scoring model resulting from a credit bureau collaboration. Curry explains that this score will eliminate differences in the number, no matter which credit bureau provides the number, because Experian, TransUnion and Equifax all calculate it in the same way. The Vantage Score runs from 501 to 990, with higher numbers being more desirable. The bureaus also attach a letter grade, from F to A, as a quick indicator of your credit worthiness.

Significance

Your credit score is very important, no matter which version a lender uses, because it influences your borrowing ability and the amount of interest you pay. For example, the FICO credit score ranges from 300 to 850. Curry explains that a person with a 520 score pays almost four and a half percentage points more than someone with a 720 score. This translates to over $110,000 in additional interest payments on a 30 year mortgage loan.