Credit Scores & How They’re Calculated 5155

Personal Finance, presentation, credit scores and how they’re calculated, prepare to get financially fit by practicing personal finance, why are there so many different credit scores, we’re going to go into some detail in terms of what goes into the creation of the credit scores, and why you might end up with different credit scores, not because you need to be able to reconcile all the credit scores or know every single detail that goes into them.


But because we want to have a general idea of what goes into them, and why you might have these different scores, you’re not overwhelmed when you’re looking at your credit information. So why are there so many different credit scores, your credit score is similar to a photograph, it’s a snapshot of your credit situation at one particular moment in time.



So obviously, when you’re looking at your credit, it’s always changing over time. So what is happening is they’re trying to get the information up to this point in time that they have in order to give you the credit score at that point in time. So like a photo, the quality of it depends on on where you are that day, who’s taking the photo, and why you’re taking it, and what kind of camera they’re using.



So there’s going to be a lot of things that are going to be involved when we’re taking that snapshot of our credit history, which again, are going to include the timing, when in point in time, are we taking this and what kind of information is available at that point in time, because again, this things change all the time, who’s taking the photo, so who’s taking it could also determine what what they’re looking for when they’re thinking about that particular snapshot for their resources, their algorithm, in essence, that they’re going to be putting together, why they’re taking it.



So the reason that they’re taking the photo will help them determine how they’re going to be putting this thing together, how they’ll put your credit score together to help coincide with their objectives, and what kind of camera they’re using. What are they using essence, what’s their algorithm that they’re going to be using in order to create the credit score? standardized credit scores have only been around since 1989, when the Fair Isaac Corporation devised the first credit scoring algorithm. So it’s still an evolutionary type of thing that hasn’t been around all that long of a time. And obviously, is a complex situation to try to standardize these credit scores.



So there’s not complete standardization across the board for all the scores. So this credit scoring model, it’s called the FICO model, the F IC o credit score after the company’s name, standardize the process of credit diagnostics, and quickly became the industry standard. So if that’s the case, why we have multiple credit scores. So in other words, if they standardized it, we still have these differences that are going to be coming out because again, there’s complexity within the credit scores. And we grab these different objectives that different people might want to put more emphasis on within them. And there’s also timing differences that we’ll talk about.



So if the process is standardized, in other words, why do we have a different credit score on every credit report, lenders use different scoring models based on the credit type. So this credit type that they’re looking at might apply a different model, because again, that means that their objective could be slightly different. So they’re going to be using a different kind of algorithm, you can think about it, the three consumer reporting bureaus use different credit scoring formulas.



So we got the three major places here, and they have different formulas for themselves trying to basically compete with each other and come up with the best information based on their special, what’s your special sauce of formula, right. And then information may vary from Bureau to Bureau. So as they pick up the information, they may have timing differences as to when they’re picking up the information and what information they have available to them. And of course, again, the timing matters.



This is something that is a snapshot in time and time is continually moving, so that credit report will continually be moving as as things change over time. Lenders use different scoring models based on credit type. So when you apply for credit, one size doesn’t fit all. Mortgage Lenders typically use one FICO score model, while also lentos lenders and credit card issuers often choose to use the FICO auto score or FICO bank card score to more accurately measure the credit worthiness of borrowers.



So notice depends what you’re doing here, what you’re looking for the credit score for that they’re going to use these different models, they could end up in the different results. Now again, in general, you’re looking for just basically creating over time a good solid credit score. But if you’re looking in particular at one particular area, this could help you to more focus in zoom in on one particular area that might have a more of a focus on one thing or another to increase your credit score if you’re looking to increase this credit score over a short time for a particular purpose.



So some lenders use scoring models other than the FICO model as well because each scoring model measures different aspects of your credit your Score can vary depending on the model that’s used. So obviously, the models can be quite complex. And so therefore different models will have different results. So if you’re comparing different credit scores, make sure you’re comparing apples to apples when it comes to the scoring model used, scores can also vary because the range of different of the different for standard and industry specific scoring and the standard FICO credit score,



it has a range of 300 to 850, while the FICO auto score, bank card score have a slightly wider range of 250 to 900. So notice you have these different ranges that you’re talking about, depending on the scoring model that you’re going to be using. So the three consumer reporting bureaus use different credit scoring formulas. So we have these three bureaus that are basically competing, in essence, you can think of them trying to come up with the best, most dependable you would think model that would then create them or make them the standard bearer.



So each of the three major consumer reporting bureaus, that’s the experience, the Equifax and TransUnion, use different formulas in compiling your credit score and determining your credit score. Among all three bureaus. There are 28 different FICO credit scores that are commonly used. So now you got the three major scoring bureaus, they have the differences that they’re using within them. So you got 28 different FICO credit scores. Again, this is probably over the head of what normal people need to know, to just work on their credit score and have good credit, in essence.



But it can be kind of confusing when you’re trying to figure out whether you have good credit, or you’re looking at your credit, and you’re trying to say why is it changing? And these type of ways? Why do I have these different scoring models, and have a general idea of of these things. And then when it comes to a specific decision and who you’re dealing with in a specific lending situation, it might be useful than to zero in on what exactly, of course, they’re looking at in that particular situation.



So therefore, depending on which Bureau is evaluating your credit, and the reason why you could have a dozen or more different credit scores on the same day. So information may vary from Bureau to Bureau. So all of your credit information that may not be reported to all three consumer reporting bureaus sent it since it comes from a variety of sources. So they’re trying to compile all the sources together so that they can put it into their algorithm.



But you know, they might not have all the same sources for the three different locations, which of course, if you have different input going in results in different output coming out. Therefore, don’t assume each Bureau has the same information on your credit history. If you’ve applied for credit with your median name, with your maiden name, with different versions of your name, there, there may be fragmented or incomplete files at the three consumer reporting bureaus resulting in very different scores.



So especially if you’ve had name changes, and so and so on, then of course, they would be more difficult for them to be picking up the information, there could be fragmental information as they’re saying here, which could result in differences in the credit scoring. So timing matters. Your credit score can also vary across three consumer reporting bureaus because of timing, information about your credit can come from different reporting sources at different times.



So remember, the credit score is that snapshot as of a point time kind of like a balance sheet type of thing as opposed to an income statement. But the information is changing all the time. So you can think of it similar as a bank reconciliation situation. If the if one bureau doesn’t have the information, even though it’s out there and another one does, then of course, you’ll result in differences between the inputs at that point in time.



Each bureau updates credit reports at different times of the month. So it may be that they have the information but they periodically updated at different intervals as well. Therefore, you could have three different scores on the same day also, that timing can impact you when you when one credit bureau is missing an account or other information that that either helps or hinders the score.


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