Credit Scoring Methods

In most cases, when you apply for credit at a bank, store or other business, the business pulls your credit report and your credit score. The business get your credit report from one of the big three credit reporting agencies: Equifax, Experian or TransUnion. The business also obtains your credit score from either the Fair Isaac Corporation (FICO) or the credit reporting agencies via VantageScore. The credit score is a shortcut method for the business. The credit report gives your entire credit history, from your first loan or credit card through your current balances. The credit score distills that entire credit history into a single number or letter grade. In many cases, when a business needs to make a quick decision on whether to grant you credit, it will base its decision on your credit score.

FICO has been the most widely used credit-scoring method. It's generally considered the industry standard, although it has a more recent competitor, VantageScore. To arrive at its scores, FICO measures, in order of importance: Whether you have paid your accounts on time; how much debt you currently have; how long you have been using credit; whether you're currently applying for a lot of credit; and other minor factors, such as whether you've had many different types of credit--including credit cards, lines of credit and loans. FICO weighs these factors and awards you a score from 300 to 850. A higher score means businesses consider you a better credit risk. Specifically, a FICO score of 850 means creditors don't see much risk in lending you money. They believe you will pay them back. On the other hand, businesses believe the likelihood you won't repay them goes up as your FICO score goes down. Most businesses won't grant credit to someone with a FICO score of 300.

Traditionally, all three major credit reporting agencies have used FICO to generate credit scores for sale to their customers. FICO scores generated by the credit reporting agencies may differ from each other and from that generated by FICO, because each agency may collect different credit information about you. Equifax's Score Power includes your credit report and an Equifax-calculated FICO score called BEACON. TransUnion's FICO score for its customers is called TransRisk. Experian's in-house FICO score is called Experian Fair Isaac Risk Model. But Experian also created its own PLUS score, which considers the same factors as does the FICO but weights each item differently. Experian's PLUS score measures the frequency with which you've been applying for credit; how many credit accounts you have; your payment history; and how much you currently owe on all accounts. PLUS awards a score between 330 to 830. A higher score means you are a better credit risk. Experian believes PLUS is easier to understand than FICO and measures recent changes to your credit history and spending habits more accurately.

In 2006, the three credit reporting agencies released VantageScore, a new credit scoring method to compete with FICO. VantageScore measures credit history factors similar to FICO. In order of importance, VantageScore measures your payment history; how much credit you're using compared to how much credit is available to you; how much total debt you owe; the length of your credit history; how many recent inquiries you've made for new credit and accounts; and how much credit you have available to you right now. VantageScores are determined numerically, ranging from 501 to 990, but are reported alphabetically. The higher, the better. So 901 to 990 = A, 801 to 900 = B, 701 to 800 = C, 601 to 700 = D and 501 to 600 = F.

The credit reporting agencies all now report VantageScore. But they still report all the other scores, too.