Understanding the Vast Business of Scoring

Scoring thresholds for approvals and better rate offers on loans have become higher while lenders of all kinds depend on scores to evaluate and curb risk making it essential for all of us to understand who creates these scores, where they are offered, and what the variations are.

It is always important to note that there are many scores and each may have a different range. For example, if you pull a Fico score the range is 300-850 and anything above a 740 is excellent. If you pull a Vantage score the range is 501-990 and it has letter grades A-F. If your Vantage Score is a 740 it does not mean you have excellent credit.

Most consumers think all scores come from the bureaus which is also false. Fico created the first scores for lenders to evaluate risk. When banks found themselves getting sued for discrimination due to underwriters (bank employees) being the sole authority for rejecting applicants, the demand for a score to use as an indicator of risk became prevalent. This was a way for the focus to come off the banks when consumers were rejected. Fico is and always has been a separate company from Experian, Trans Union, and Equifax. The Fico scores used by lenders are scores created by Fico for the purpose of each bureau to sell to lenders. The bureaus use their Fico version score formula for lenders to evaluate the information the bureau compiled on a specific consumer in the form of a number. The lenders pay a fee to the bureau for this service. Equifax and the other bureaus pay Fico a royalty when using the Fico formula created for them. Equifax, Experian, and Trans Union did not create any Fico scores.

There are many models of the Fico Scores made specifically for Experian, Trans Union, and Equifax and each bureau has separate names for their versions:

Equifax has Beacon 09, 05, & 96 or you might see these same versions displayed on the report as Beacon 5.0 and 9.0 as well. There is also Pinnacle 1.0 & 2.0 which is Equifax Fico next generation.

Trans Union Fico scores are called Fico Risk Score Classic 08, 98, or 04. There is also Fico risk score Next Gen. The old name of the Trans Union Fico score was Empirica.

Experian has the Fico Risk Model 08, V2, V3 and Fico Advanced Risk Score 1.0 & 2.0. Experian use to call its score Fair Isaac Risk Score.

Although some of these scores are outdated they may still be used by banks. You can find the name of the model used to the left, right, or above of the score itself on a merged credit report.

Besides Fico scores, there are hundreds of other scores created by each bureau and sold for many purposes to lenders, insurance companies, credit card companies, landlords, finance companies, telecommunication companies, and much more. There are scores that decipher which consumers might be more likely to default on a mortgage already extended, scores that give insight into which consumers should be offered lower interest plus higher limit credit cards. Some scores even predict those who are more likely to go into strategic default on a mortgage loan. There are even global scores used by large corporations doing business internationally.

Just to give you a glimpse into varied scores here is a list of just a small portion of scores that one of the bureaus offers for sale:

In the Market Models
Income Insight
National Risk Model-National Equivalency Score
Decision Insight
Credit Migration Solutions
Collect Score
Auto Risk Model
Bankruptcy Watch
Retail Risk Score

These are 10 of 100’s of scores offered by bureaus to corporations as a tool to help identify consumers and existing customers that will bring more profits as well as those that will deliver potential loss.

When we think of credit scores we think of consumer scores used to evaluate risk for mortgages and those that we as consumers buy online. But understanding the vast business of scoring can help us with the big picture. Since we are all being evaluated and watched through these algorithms it helps to get a clearer view of how they work within the corporations that use them.

Find out more information on my website www.northshoreadvisory.com.

Hard Inquiries and New Credit

Hard inquiries are a consequence of applying for credit and have an effect on scores in their own right. When consumers apply for credit cards or increases in limits issuers must review credit to decide if they will make approvals. This “hard pull”, or review, can drop scores up to 5 points each. When consumers have excessive inquiries it can impact the score even more. Studies show many credit applications make much riskier borrowers therefore the score can see greater reductions if consumers apply excessively. It is best to use hard pulls cautiously as Fico does not tell us exactly what “excessive” means since much of the reasoning behind the score algorithms are kept a secret.

When applying for a mortgage, student loan, or car financing hard inquiries also occur but can affect scores differently. According to Fico when a lender falling into these categories pulls credit and causes a “hard inquiry”, within the first 30 days there is no reduction in score and any inquiries will have no consequence to the score. After the 30 days pass the inquiry(s) will be viewed as one score reduction whether there are many or one within that period. This time frame is called a window. It used to be that these types of inquiries were within a 14 day window. These days the window is either 30 or 45 days depending on the lender. Most lenders are using 30 day windows. This means that the Fico score will look for groupings of inquiries and count them as one hard pull within a thirty day period, dropping scores up to 5 points for each window. Remember, if a consumer has their credit pulled (by third parties) excessively the score will drop further. However, when consumers review their own credit it is considered a “soft inquiry” and does not affect credit scores AT ALL.