5 Major credit scoring models

Credit scores are one of the most important components of a consumer’s personal finances. It dictates the quality of the loan you would be eligible for as well as the interest rate which will be tacked on to the borrowed principal. Potential lenders and creditors base their decision to grant or deny you a line of credit based on your credit score.

Developed in 1970, the Fair Isaac Corporation introduced a method to measure the ‘creditworthiness’ of an individual. It took into account multiple factors like the length of an individual’s credit history, recent ‘hard’ enquiries, credit usage ratio, etc. while calculating the score. 

In the years following the formal adoption of the FICO scoring system by businesses and lenders all over the nation, a handful of consumer and credit analytics company developed their own credit score formulas and scoring models. Currently, there are 5 different types of credit score formulas (including the FICO formula) in circulation, each with varying characteristics. This has caused much confusion within the consumer community.

Here is an analysis of the major scoring formulas.

The FICO score
This is the most widely adopted credit score and scoring model in the industry. The Fair Isaac Corporation is the father of the FICO score and is the originator of the credit report concept. Credit reports are generated by the three leading credit reporting agencies (CRA), namely, Experian, TransUnion and Equifax. Since every creditor doesn’t report to all of the 3 credit reporting agencies, FICO scores generally happen to vary from CRA to CRA. Sometimes, the score point deviation can be as much as by 80 points. The FICO score scale runs from 300 to 850 points.

The PLUS score

PLUS is an acronym for Plan, Live, Understand, Succeed and this particular scoring model was developed by Experian. The formula and the score calculation system was developed solely keeping consumers in mind. Unlike the FICO score scale, the PLUS score ranges between 330 and 830. The Experian PLUS score is not the same as the Experian ScoreX PLUS which is not available to consumers.

The VantageScore

This particular scoring model was developed in 2006 as a joint venture between the top 3 credit reporting agencies. The scoring model had been developed to compete with the FICO model and scoring system but failed to catch on. Very rarely do lenders and financial institutions use this particular scoring system. One of the major advantages of the VantageScore model is that the score gaps between reports generated by all the 3 major CRAs are significantly smaller since the scoring model and the underlying computational algorithm used by the 3 CRAs are the same. The VantageScore scale ranges from 501 to 990.

There are two more scoring systems which are little known and rarely used by consumers. These are:

TransUnion TransRisk Account Credit Score

The proprietary scoring model was developed by TransUnion and free credit score providers like Credit Karma are known to use it. TransRisk offers separate scores for home and auto loan accounts. Their scoring scale ranges from 300 and 900 while home and auto credit score scale ranges between 150 and 950.

Equifax Score Power

This particular score is not based on a different scoring model. Rather, it is the name Equifax uses for the FICO based score that appears on the credit reports generated by Equifax.

One of the more important things to note is that the score varies according to the scoring model used for the calculation. Therefore a FICO score of 750 is in no way comparable to a PLUS score of 750. Other than these 5 scoring models there are a few others which use different parameters to calculate credit scores although most lenders refrain from using them.

Don’t Buy Non-FICO Credit Scores

By now, many people are well-aware that the credit score is an important factor in finances.

The main reason people worry about their credit scores usually has to do with borrowing money.  When consumers think about the word “credit score,” the score they are considering is the FICO score.

Each of the three major credit bureaus has its own score, based on the information in your report. The algorithm for figuring out your credit score for each is slightly different. If you check a web site owned by Experian for your credit score, it will likely be different than your actual FICO score. The same is true of a free credit score site owned by TransUnion or Equifax.

Don’t be fooled; many of those paid credit score sites, and free credit score sites offer scores that are different from FICO. (In fact, Experian was sued for fraud because some consumers think they will get their FICO score when they visit FreeCreditReport.com.)

However, if you are using paid credit score services to look at your score, it’s usually not going to be worth your money. Although you are getting a credit score, it isn’t your FICO score, and it may not provide you with an accurate picture of how lenders see you.

3 key housing issues real estate professionals, consumer advocates and entrepreneurs hope the president and Congress resolve in 2013

1. Clearly identify for mortgage lenders what qualifies as a 'qualified mortgage' and thus allow them to lend with confidence. (Not all but many of the challenges in lending stem from this uncertainty.)
2. Extend the mortgage forgiveness debt relief act of 2007- this tax exemption has encouraged appropriate settlements and removing this exemption would discourage recovery.
3. Reform the GSE's, primarily, 'Fannie and Freddie'. So much of the run up in false home values has now been statistically traced back to these corporations and their powerful influence on the housing climate in the United States.

3 Common Misconceptions About Negative Credit Reporting and Timing

Misconception #1

The statute of limitations regarding credit reporting and barring collectors from suing to collect debts are the same.

Correction: Incorrect.

The two statutes of limitation have nothing to do with each other. For example, if you defaulted on a debt in California, the collector cannot sue you after four years have elapsed.

However, the item can still be reported to the credit reporting agencies for seven full years. That means the collection will become a “time barred” debt a full three years before it can no longer be included on a consumer credit report.

Misconception #2

If I make a payment on a defaulted debt or collection, I’m restarting the 7-year credit reporting time frame.

Correction: Incorrect.

The 7-year clock begins at a very well defined point in time relative to the original debt. Credit reporting can occur for no longer than seven years from the date the original debt was charged off (or subject to a similar action).

That means you can make payment after payment after it has been charged off or sent to collections and the date from which the counter begins cannot be updated to be any more recent.

FYI: There are exceptions to this rule for defaulted student loans.

Misconception #3

If a creditor sells a defaulted debt to a debt buyer or collection agency, the buyer can report the collection to the credit bureaus for seven years from that time.

Correction: Re-Aging

Re-aging, in the credit reporting world, is when a creditor or collector changes the date from which the 7-year credit reporting period begins to make it more recent, thus causing an item to remain on a credit report longer than the seven years allowed by Federal law.

Possible Cause of Credit Limit Reductions or Account Closures

There are many reasons why the credit card issuer may have taken an adverse action against you.

1. Credit Score Related – Credit score falls below minimum score threshold. Action could be based on how far below the threshold the consumer falls.

2. Credit Data Related – A new delinquency hit the credit report; a new inquiry hit the credit reports; a new credit card hit the credit report; the consumer increased the amount of debt he or she is carrying; the consumer's credit card utilization increased on one or all cards.

3. Geography and Economy Related – Consumer lives in an area where home values have descended (no equity). Consumer lives in an area where the unemployment rate is disproportionately high.

4. Issuer Related – Issuer determines that your account cannot remain profitable under current terms

How long will the items get reported on my file?

• Delinquencies (30–180 days): Can remain seven years from the date of the initial missed payment.

   

• Collection accounts: Remain seven years from the date of the initial missed payment that led to the collection (the original delinquency date). When a collection account is paid in full, it will be marked "paid collection" on the credit report.

• Charged-off accounts: Remain seven years from the date of the initial missed payment that led to the charge-off (the original delinquency date), even if payments are later made on the charged-off account.

• Closed accounts: Closed accounts are accounts that are no longer available for further use. Closed accounts may or may not have a zero balance. Closed accounts with delinquencies remain seven years from the date they are reported closed, whether closed by the creditor or by the consumer, but the delinquency notation will be removed seven years after the delinquency occurred when pertaining to late payments. Positive closed accounts remain ten years from the closing date.

• Lost credit card: If there are no delinquencies, credit cards that are reported lost will continue to be listed for two years from the date the card is reported lost. Delinquent payments that occurred before the card was lost are reported for seven years.

• Bankruptcy: Chapters 7, 11, and 12 remain for ten years from the filing date. Chapter 13 remains seven years from the filing date. Accounts included in bankruptcy will remain seven years from the date they were reported as included in the bankruptcy.

• Judgments: Remain seven years from the date the judgment is filed.

• Liens : City, county, state, and federal tax liens. Unpaid tax liens remain fifteen years from the filing date. Paid tax liens remain seven years from the paid date of the lien.

• Inquiries: Most inquiries listed on your credit report will remain for two years. Some inquiries, such as employment or pre-approved offers of credit, will show only on a personal credit report pulled by you.