Understanding your credit score is confusing but worth the effort
Some numbers matter more than others in life. Your cholesterol count, your wedding anniversary date, and your credit score: These are numbers that matter. They may not matter in that particular order, but they are the kinds of numbers that can have significant impacts on your life, especially if you happen to forget them.
One of the things that makes understanding Confusion is the norm for consumers when it comes to understanding credit scores. Credit scores are difficult because there are multiple scores. Which number do creditors give the most weight when evaluating credit? In reality, credit bureau scores weren’t meant for the consumers to deal with, but here’s some info that will at least make them understandable.
A brief history of the standardized credit score
Before the creation of standardized credit scores, lenders and banks used their own systems to evaluate lending risks. These systems were based entirely on a credit report and varied drastically from one lender to the next. The big problem with the original system is that it was based on a bank officer’s ability to evaluate risk, but without a clear set of rules with clear calculations.
The Fair Isaacs Company developed the first credit scoring system in the 1970s to help minimize inconsistencies in lenders with their own credit systems. The new system became known as the FICO scoring system. The FICO scoring system is based on an algorithm which has been widely adopted by major credit reporting bureaus. One pervasive question about FICO scores is why each bureau reports a different score. Often, the scores differ by quite a bit, which only adds to the confusion in understanding credit scores.
Why are there several scores and why do the differ?
There are three major credit reporting bureaus: Equifax, Experian, and TransUnion. One reason your scores differ is that not all businesses report everything to all three. Scores are different because the methods by which they are derived are different. For example, TransUnion might not have exactly the same information about your credit history as Equifax does, and vice versa. Each bureau may be missing information that either helps or hurts your score and will derive a different credit score based on the information at hand.
So, what’s in a number?
Each of the bureaus claims that their score is the most reliable, naturally, but in reality, one particular score may be different from the others, but it is not necessarily any better. You can get a lot farther to understanding discrepancies in your credit scores by comparing information in each reprt and make sure it’s accurate. Disputing erroneous information will help clear up inaccuracies by and give you the best score possible. You may not be an expert at understanding credit scores, but at least you will understand what’s on them.
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