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What are Credit Risk Scores?
Credit scoring has rapidly become the primary means of assessing a consumer’s creditworthiness. Financing decisions of all types are often made based on a consumer’s credit report score.
Credit score rating produced from models developed by Fair Isaac Corporation are commonly known as FICO® scores. FICO is the most popular scoring model used among lenders and creditors to calculate a consumer’s credit risk. This mathematical equation evaluates many types of information from a consumer’s credit bureau credit report. By comparing this information to the patterns found in thousands of past credit bureau credit reports, scoring estimates the level of risk a lender or creditor is assuming.
Each of the national credit bureaus – Experian, Equifax, and TransUnion – utilizes the FICO algorithm to provide credit scores. No matter whether you get an Equifax credit report, Experian credit report or TransUnion credit report, the basic FICO algorithm is still in play. Experian, Equifax, and TransUnion each market their credit scores under a different name:
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Credit Bureau
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Credit Score
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NextGen Score
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Experian
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FICO II
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FICO Advanced Risk Score
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Equifax
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BEACON®
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Pinnacle (sm)
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TransUnion
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EMPIRICA®
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Precision (sm)
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Fair Isaac Corporation continually upgrades its credit score rating models in order to provide the sharpest credit evaluation possible. The NextGen (next generation) credit report score offers the latest innovations in credit risk analysis.
Each of the national credit bureaus also offers industry-specific scores and methods to check credit. An industry-specific credit report score allows lenders in the various industries to better assess certain factors in a consumer’s credit score rating file. For instance, a lender in the automotive finance industry might request a score model that more closely evaluates the consumer’s auto loan payment history.
Although the scoring methodology is the same for Experian, Equifax, and TransUnion, the actual score is based on the credit data available in the consumer’s file, and may vary from bureau to bureau. A consumer's credit score rating may also vary, depending on the credit report score model requested (auto specific, bankruptcy, etc). Credit report scores usually fall between 300 and 850 – the higher the score, the lower the potential risk posed by the consumer. Many factors come into play when determining the credit score rating, including:
· past payment history
· amount of debt
· length of time credit established
· search for and acquisition of new credit
· types of credit established
Not all consumers have a credit score rating available. This is usually due to too little credit data in their file. Generally, a consumer must have at least one active credit account in order to be scored. Even then, the less credit history a consumer has, the more unreliable their credit report score may be. For instance, someone just out of college might have an excellent credit report score because of their lack of credit history. A consumer may also lack a credit score rating because that consumer is investigating data in their credit file. In this case, their file may be flagged so that no credit score rating will be delivered during the investigation.
When a consumer’s credit score is delivered with their Equifax credit report, Experian credit report, or TransUnion credit report, it will include reason codes, which explain why the consumer scored the way they did (or why no score was available). An undesirable credit score will improve over time as the consumer makes more on-time payments and uses their credit wisely. Also, existing derogatory data in the consumer’s credit history impacts the credit score less as time goes by. A missed payment from four years ago is less detrimental than a missed payment from six months ago.
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Did you know?
 Lenders consider more than just your credit score when deciding whether or not to extend credit. They consider the amount of debt you can handle given your income, your employment history, your credit history, as well as staying within their institutional underwriting policies.
Find out more information about your credit,
click here.
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