Do you know what your credit score really means? Do you know why there is not 1 credit reporting agency but several? Do you know the things that can increase and decrease your score? If you said no to any or all of these questions you’re not alone. Few people actually know what their credit report means, why it’s been set up the way it has and all the other myriad things about it. It’s with this fact in mind that we put together a little Blog to explain why. Enjoy!
First, why are there so many scores? Did you know that the average American citizen has about 35 different scores that are used for a wide variety of different credit situations? Most of these scores are simply used to predict risk, as in the risk the bank faces if they give you money. There are, if you look at things a bit simplistically, 4 kinds of scores;
- Generic scores. These are the scores that are used to predict risk on a variety of basic loans.
- Custom scores are customized for specific lenders using their specific database of customers. For example, your credit card company probably has assigned your profile a custom score.
- Industry scores are used to predict payment of specific kinds of loans like car loans.
- Educational scores are used to show consumers how they rate compared to other consumers
Now truth be told none of these scores is any better or worse than the other. If you’re looking at buying a car and a car company will purchase an industry score based on your info and get it from TransUnion, one of the Big 2 credit agencies. If you also order your free credit report (educational score) and a credit card company inquires about your score to determine whether they should increase your credit line (custom score) the numbers that all 3 get and use may be different but the basic data will stay the same.
Basically, if you have a good score with one you will have a good score with them all, and vice versa. Indeed, the same data is being used in all 3 cases but it’s just been ‘tweaked’ so that it reflects the data that the lenders want to know about your potential risk before they make any decisions.
So there you have it. That’s why there are so many scores and, basically, that’s how they are used. Now when someone asks you if you know about your credit score you’ll be able to answer from an educated perspective (if you’ve taken the time to check your score, at least).