July 2008
NOT ALL CREDIT SCORES ARE CREATED EQUAL
Your score might rise, or fall, depending on loan type and lender
By Marty Orgel, www.marketwatch.com

You may think you know your credit score, but it's a number that changes more rapidly than many consumers realize.

There's a little-known fact about credit scores, a fact the three major credit reporting agencies don't go out of their way to tell consumers: Your credit score depends on which credit agency issues the report and the type of credit for which you're applying.

"Consumers think they're getting exactly the same thing as when they walk in the door to see me or any mortgage broker," said Ginny Ferguson, a broker and co-owner of Heritage Valley Mortgage in Pleasanton, Calif., and chairwoman of the National Association of Mortgage Brokers' credit scoring committee.

"They say 'my credit score is 750' and by the time I run a credit score under the classic credit score versus the educational score, I may see a 50 to 100 point difference in that category. Oftentimes it's lower and I'm stuck trying to explain why their credit score came in lower for me than it did with them getting their score off the Internet."

The major player in the credit score industry is Fair Isaac, which created the gold standard of credit scores called a FICO, an acronym formed from the company's complete name, Fair Isaac Corp. FICO credit scores range between 300 and 850.

FICO scores? Classic credit scores? Educational scores? VantageScore? These are just three of the terms financial companies use when classifying consumers' financial stability.

More scores

The three major credit reporting agencies -- Experian, TransUnion and Equifax -- also generate credit scores. Equifax also has a ScorePower number. Experian has a PLUS score and all three companies offer a VantageScore. And there are more. Ferguson says there are as many as 10 different names and iterations of credit scores available to businesses, depending on whether you want to buy a car, apply for a credit card, an equity line of credit, or a home mortgage.

"They've taken the classic FICO credit score and modified those scoring models for specific industry end users, based on risk evaluation for that particular industry," Ferguson said.




 

Ethan Dornhelm, senior scientist in Fair Isaac's Scoring Solutions division, said there are at least four different industry options. Fair Isaac has developed specialized credit scores for the auto industry for consumers' car loan applications; for the banking industry to market credit cards to consumers; an installment loan version for industries offering home equity loans; and a fourth version, a personal finance industry option, for other types of personal loans.

A consumer with a 750 credit score from Experian could see a 700 credit score from Equifax. And that auto dealer you want to buy a new car from could come back to you with its own score of 675, or perhaps even 775. It all depends on what version of Fair Isaac's credit score software and financial analytics any company is using.

Dornhelm says these industry-specific loans give lenders the ability to make credit more available -- or less available -- depending on individual borrowers' history with paying back similar types of loans in the past.

Shop around

Fair Isaac released a new version of its FICO score analysis in January called the FICO® 08 Score, but there are no laws requiring any credit agency or business to update the systems they're currently using.

Credit reporting agencies and business don't have to tell you upfront which model they're using. Of course, once you know there are different computations out there, you can ask the agencies to tell you exactly what type of score you're getting. And you should. Both Ferguson, the Heritage Valley Mortgage broker, and Fair Isaac's Dornhelm say consumers should shop around if they don't feel a credit score is accurate.

Ferguson and Dornhelm also suggest consumers go to Fair Isaac's consumer site at myfico.com to find out what their baseline score is. It's a free service when you create an account. That way, if another institution comes up with a substantially different score, you'll at least have a starting point for asking questions.

All consumers are entitled to one free credit report per year from each of the three main agencies. Those reports do not come with a credit score, but consumers might see other offers online for free reports and free scores. Be wary - if you're not ordering your free report from www.AnnualCreditReport.com, than you may be signing up for a subscription service or other paid product. That is, the "free" may be temporary.

Go to: www.annualcreditreport.com to order your free reports.

Learning more about the inner workings of credit scores can help ease financial anxieties, which is a good thing.
Marty Orgel is a freelance writer in San Francisco.