Why Is There More Than One Type of Credit Score?
One common misconception held by consumers is that only one score is used to rate your credit. Actually, each person can have multiple credit scores from several various sources. This is because each credit bureau, lending company or other financial institution uses their own unique algorithm to determine your credit score.
“Asking why there isn’t just one credit score is a bit like asking why General Motors doesn’t build just one vehicle,” Maxine Sweet, Vice President of Public Education for Experian, writes in her blog, Ask Experian. Sweet points out that people have different requirements for their vehicles and use them in different ways. So, while vehicles “all use the same basic technologies and principles, they are slightly different to meet the very specific needs of the people who use them.”
Credit scoring is similar, in that the lenders interested in your credit worthiness are each concerned with different aspects of your credit. Different credit scores evolved to analyze your basic credit information in a way that will be most useful to different types of creditors.
For example, a mortgage company may be interested in how likely you are to make your house payment reliably. An auto lender will be concerned with whether or not you’ll repay your auto loan as agreed. And an insurance company may want to be able to predict how likely you are to make a claim. While the basic information evaluated may be the same – length of credit history, ratio of credit used to credit available, payment history – how each score evaluates that information will vary.
Sweet also points out that economic competition can influence the number of scores that exist. Competing credit bureaus are constantly working to improve the effectiveness of their scoring models in the hopes of gaining a greater share of business from the companies that buy their scoring information.
While it’s important to understand why different credit scores exist, it’s more important to know what makes a solid score. Common credit mistakes can cause your score to sink. But paying bills on time and not missing payments are the best habits to keep when working toward a stronger credit score.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc. © 2013 ConsumerInfo.com, Inc. All rights reserved.
