Credit scoring seems like it should be a simple concept. However, all the financial information provided to consumers is confusing. You may see multiple scores and various criteria used by banks, credit card companies, and other lenders. What is your actual credit score? Read on for an overview of credit scores and what they mean for the general population.

All scoring methods generally use statistics and analysis to determine consumer credit payments over time. All are used by lenders and financial institutions to facilitate the granting of credit, loans and mortgages to individuals. Payment history, total debt, number of cards, and other information are used in most scoring models.

The history of credit scores

Until the 1970s, credit scoring systems were not the prescribed way to determine creditworthiness. Financial institutions used human metrics such as personal relationship with the customer, body language, and initial conversations. Financiers often shared information across the industry when they had mutual clients. The results were often misleading, and the financial institutions themselves suffered losses associated with unreliable consumers.

Equifax, now a big 3 credit bureau, paved the way for the future collection of credit information as the first company operating with the goal of collecting consumer data. TransUnion followed Equifax in the 1960s. Data collection in the 1960s included irrelevant information about habits, vices, and personal opinions. The level of misinformation and distrust of the general population eventually led to the passage of the Fair Credit Reporting Act in 1970, which regulates the data collection and circulation of consumer credit information.

FICO (Fair Isaac Corporation) is known as the universal credit scoring method. All three major US credit reporting agencies use FICO scores on their credit reporting documents. More than 80 countries around the world also use FICO information to improve business processes. FICO helps consumers manage credit health around the world through its analysis and reporting information.

The company was founded in 1956 and now 95% of the largest financial institutions in the United States use FICO information in their daily business activities. One hundred billion FICO credit scores have been sold since the company began scoring.

FICO began sharing credit information with businesses in the late 1950s, when the company started. In 1987, individual FICO scores became more widely available to lending professionals. It wasn’t until 2003, with the passage of the Fair and Accurate Credit Transactions Act, that credit information became freely available to consumers once a year.

VantageScore began in 2006 as a collaboration between the three major credit reporting agencies. Experian, TransUnion and Equifax developed VantageScore to improve their data analysis techniques. The company focuses on providing accurate consumer information in the context of relevant economic data. They are dedicated to finding a solution and standardizing certain consumer data sets across all three bureaus.

The system has been adopted by large financial institutions and lenders as an alternative to FICO. Approximately 10% of the total market currently uses VantageScore. The VantageScore “credit report card” is available to consumers free of charge beginning in 2013. The consumer market is likely to see increased use of VantageScore as a direct competitor to FICO.

Why, if all of this information is regulated and shared across the industry, do we get different scores from each credit reporting agency? The truth is that all the major credit bureaus (Equifax, TransUnion, and Experian) look at credit information differently. Companies receive their relevant financial information at different times. If a credit card statement is unpaid when the details are sent to a bureau, your credit score could be affected by that information.

Financial institutions actually rely on numerous scores to determine their individual criteria for granting credit. FICO itself offers more than 50 unique scores. Consumers who receive credit reports only see a selection of the information determined to be most useful. These consumer-driven scores are often completely different from the numbers that a financial institution will assess. They are strictly educational in nature and are used to provide consumers with a sense of overall credit worthiness.

Individual companies can also implement their own scoring equations. Ultimately, there may be different scores from FICO, VantageScore, Experian, Equifax, TransUnion, and independent companies. So many numbers floating around make it difficult for the average consumer to understand what numbers to evaluate for personal finance.

where to look

Those looking to get a sense of the overall financial picture can look to any of the scoring methods to get a reasonable picture. If you’re trying to determine how your score will appear to another party, a lender or a bank, you may have a harder time finding accurate information. Ask your lender what scoring method was used for your situation to determine where to find specific numbers associated with a loan or financial inquiry.

Your true, accurate, real credit score will not be found by evaluating a score. The formulas that guide the credit score vary slightly, giving more or less weight to factors such as credit history or outstanding debt. Most of us don’t need a 100% accurate credit score. Personal finances and a general understanding of your situation can be obtained through any of the major credit scoring companies.

More information

If you’re still confused by credit scoring methodology, you’re not alone. The process is full of nuance and statistics that those who are not in the finance field often find difficult to understand. Contact credit services and counselors for more information about your particular situation. Consumers sometimes need help determining methods to improve credit scores, as well as challenging inaccurate information that can lower a score across all scoring models.

Look at your credit reports from each of the 3 bureaus at least once a year. You, the consumer, or a credit repair specialist may need to address any information that is inaccurate or misleading. Finding a firm that specializes in credit law will give you the peace of mind that your credit score is in the hands of people who know what can be done legally to improve your credit score.