Various models of credit scoring have been used over the years, both calculated manually as well as provided electronically by credit reporting agencies.
In the past, manual credit scoring used by lenders would assign a variable a certain number of points for on-time payments and subtract points for negative credit entries. This method of scoring is no longer used and was proprietary to the lender implementing the system.
Credit scoring today provides lenders with a quick access into a borrower’s past consumer credit patterns. There are several credit scoring models that businesses use when evaluating a request for credit. The most popular scoring method is provided by the Fair, Isaac Corporation, most commonly known as FICO. Credit scores provided by FICO range from as low as 300 to as high as 850.
The average credit score in the United States is typically around 720 based upon the FICO system.
There are other credit scoring models, such as the Vantage score, but the FICO score is one of the most popular for consumer credit scoring. Note that the credit scoring model or program is separate from the individual credit histories of individual consumers. All of the major consumer scoring models rely on credit data provided by credit reporting agencies.
There are three main credit reporting agencies, TransUnion, Equifax and Experian in the United States. Each agency will usually provide different credit scores for each individual consumer – even if all three use the same FICO model. The reason is that each credit bureau may not have the exact same detailed history for each consumer. For example, TransUnion may have more information than Equifax or Experian for particular accounts. They may also use slightly different FICO scoring models.
Most lenders and financing companies will evaluate all three credit scores, especially for larger loan amounts, such as mortgage and car loans. When all three credit scores are reviewed, many lenders often use the middle score, throwing out the highest and lowest score.
Credit scores rely primarily on at least six credit characteristics:
Payment history accounts for about 35 percent of the total score, while available credit and current debt levels account for 30 percent. The exact percentages are proprietary secrets and vary among the different scoring models. More emphasis is placed on the most recent two years’ payment patterns compared to older credit history.
Different lenders may also use slightly different models. For example, mortgage lenders may use a scoring model that gives more weight to the consumer’s previous mortgage history, while auto loan companies may likewise give more weight to previous car loan history.
Different businesses can use credit scores for other considerations besides extending credit. Some employers can request a credit score for a prospective employee. Insurance agencies can also use credit scoring as part of their evaluation process.
The important thing to understand about credit scores is that your credit history affects many facets of regular life. From getting a good job or opening a cellular phone account to buying a home or applying for a personal installment loan, your credit history matters. Regularly checking on your credit scores help consumers avoid surprises, as well as address potential obstacles or rejections.
Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.