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Significance And Reasons For Variance Of Credit Scores

You may sometimes wonder when you look at your credit score but taken out from different sources that why it differs from one creditreporting agency

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You may sometimes wonder when you look at your credit score but taken out from different sources that why it differs from one creditreporting agency to another, you being the same person and the debts remaining the same, in number and state. In order to know the reasons of such variance you must first understand the basics of credit score.

  • Ideally, your credit score is the most significant and probably the first tool that all lenders will use to determine your eligibility for availing loan and affordability to repay it on time along with the predetermined interest to the lender.
  • If the law of the state permits than this credit score is also used by the insurance companies at times to determine the rate of your insurance.

However, there is no specification as to determine the exact point when your credit score will start to affect your credibility but in general any low credit score will mean low amount of loans at high amount of interest and stricter terms, if at all a loan is sanctioned by the lender.

Therefore, your credit score is a very important number to consider when you apply for a credit card, auto loan or a mortgage. This signifies your financial well-being.

Reason for discrepancies

However, given that fact that there are so many different credit scoring models out there, it may really be difficult for you to keep a track of them all and make a fair comparison of credit report companies. Moreover, the fact that your credit score will differ between different creditreporting agencies, also known as credit bureaus, things will seem to be even tougher.

In order to make your comparing process simpler and make things easy to understand you will need to know a few things first. These are:

  • It is natural and perfectly normal to have a slight difference in your credit scores taken out from different agencies.
  • The facts mentioned on your credit score largely depends on the info sent by your lenders who have the discretion to decide which information to report and to which major credit agencies in the first place.
  • Your FICO Scores will entirely depend on the data collected and listed on your credit reports.

Though these are the primary reasons as to why you do not see the exact same score in every report taken out from every creditreporting agency, there are of courseother reasons for such variances or discrepancies in your credit reports.

However, the good news is that most of these credit reporting agencies often consider the similar factors while determining your credit scores. These are:

  • Making payments on time
  • Keeping credit card balances low and
  • Not opening new credit card accounts if not required.

If you make sure that you take care of these common factors then you will have your credit score in good shape all-round and have almost similar scores. Remember, it is your healthy financial habits that will take you a long way into a debt free life and prevent providing the creditreporting agencies with any opportunity to reduce your credit scores.

FICO credit scores

It may not sound strange or new to you, knowledgeable person that you are, that in the old days, money lenders and banks typically used their own “score cards” to evaluate the risk of lending to a specificborrower.

However, these scores varied drastically from one lender to the other and the borrowers then had no other alternative but to agree and accept the lending terms of the money lenders which were often strict and strange! As for the banks, it all depended largely on the ability of the loan officer to judge risk.

This was the lending scenario till not every long ago. In order to resolve these issues, discrepancies and differences in credit score, the Fair Isaac Corporationformerly known as Fair, Isaacand Company, in 1989 came up with a generalpurpose credit score for the first time. This is known as the FICO Score.

This FICO score actually filters through all the information in your credit report and then calculatesthe final score.Since then, the FICO Score offers 28 unique scores that are used by different money lenders and banks to make their credit card, auto and mortgage lending decisions.

Other credit scores

FICO Scores are just one of the other credit scoring models that you can have today and some of it may be unknown to you. The other primary credit scoring model is the VantageScore.

As far as the credit reorting agencies are concerned, there are primarily three major ones namely:

  • Equifax
  • Experianand
  • TransUnion.

They teamed up in 2006 and created the VantageScore Solutions, an independently managed firm.

The latest scoring model

The credit agencies have come up with their fourth version of their latest credit scoring model, the VantageScore 4.0. However, their previous version the VantageScore 3.0is still used widely used by the banks and financial institutions.

The VantageScore 4.0 will be made available to the lenders this fall but it will surely take some time by the lenders to switch to this new model and therefore may not make the change immediately.

No matter whichever scoring model the lenders use, FICO Scores or VantageScore4.0 and how differently they may evaluate your credit scores, their primary focus is on how well you manage your finance and how responsible you are when you borrow money.

Factors that creates variance

There are a few other specific reasons for the difference in scores from FICO and other three major creditreporting agencies. These are:

  • There can be difference in dates which is why you should compare your scores from the same date
  • There may be different scoring models used and
  • There may be different credit reports used as send by the lenders.

The range of this score is 300 to 850 pointsand ideallya good credit score is above 800. However, the national average FICO credit scoreis 695. Make sure you check your credit reports periodically for errors and get it removed to stay within this ‘fair’ range.