Credit scores are an important aspect of anyone’s financial life, as they are used to gauge whether an individual is worthy of a new credit card, an auto loan, a mortgage, or even a new job. Responsible financial behaviors, like paying bills on time and not maxing out a credit card limit, work to the benefit of your credit score, while bad habits, like failing to pay a creditor by the due date, work against you. It can take some time to understand how credit scoring works fully, and it is complicated by the fact that credit scores are not the same across the board. Here’s what you need to know about why credit scores differ.
Consumer Credit Bureaus
Every individual credit score is calculated based on information provided by lenders and other creditors to the three national credit bureaus – Equifax, Experian, and TransUnion. While the majority of the information collected by the three bureaus is similar, differences do exist. Not all lenders report the same information at the same time, meaning a check of one credit score calculated by one credit bureau may be different than the credit score from another bureau when pulled on the same day. Don’t be surprised if a check of your credit score differs from bureau to bureau due to these differences in reporting.
In addition to the timing of credit data reporting, the three credit bureaus may calculate individual scores differently. FICO scores are the most widely used among the credit bureaus, and while the algorithm is nearly the same, the version of the algorithm can change. Think of it like your computer’s operating system – every once in a while an updated version is pushed out to users which includes small tweaks to optimize performance. FICO credit scores are the same in that the underlying calculations are changed over time to predict a borrower’s risk better. When a credit bureau is slower to adopt the latest version of FICO, your credit score could look different at that agency than it does with the other two.
FICO vs. VantageScore
The three major credit bureaus utilize FICO scoring models and have for a number of years. However, another type of credit scoring model has been on the market for the last decade, adding more confusion to the mix. VantageScore, FICO’s largest competitor, calculates individual credit scores based on similar information from creditors, including credit limits, late or missed payments, collection accounts, and court data. But there are subtle differences in how that information is used to generate a credit score compared to FICO.
For instance, accounts in collections are disregarded once the balance owed is paid off, potentially increasing a VantageScore, but FICO includes these accounts in its calculations. Also, VantageScore includes alternative credit data, like utility bill payments and rent, while FICO does not. These slight differences mean a credit score produced by VantageScore could be drastically different from a FICO score, even if your credit history has not changed.
It is important to understand how credit scores are calculated so that you have an opportunity to maintain good credit or work toward improving bad credit over time. The three credit bureaus will not always produce the same credit score based on the same data, and the differences between FICO and VantageScore models produce varied results. To ensure you’re on top of your credit score(s), take the time to check with the three credit bureaus as well as other sources at least once per year.