Why a credit score by itself is meaningless

Dear STO,

You have hit on a point I’ve been trying to make for a very long time – a score by itself, without context, is meaningless to an individual consumer. The reasons are very simple.

• There is not one credit score. In fact, there are at least 1,000 different credit scoring systems used by lenders. There are credit scores for specific lenders, for specific types of lenders, and specific types of lending. For example, your bank may use a credit score created specially for its use, and only its use. There are different credit scores for credit unions and for credit card providers. And there are credit scores designed only for auto lending, mortgage lending, and even insurance purposes.
• Different credit scoring systems have different scales. Most are familiar with the 350 to 850 scale associated with Fair, Isaac Corporation (FICO) scores. Their newest scores, however, have a scale that goes to approximately 950. The new VantageScore, developed by the national credit reporting companies, has a 500-990 scale. Other scores have scales that go to zero with a lower score being better. There are even credit scoring systems that do not generate numbers. Instead, they generate statements like “approved,” “declined,” or “submit for further review.”
• Even when two scoring systems have the same scale, your scores from each can be very different. For example, there are FICO scores designed specifically for auto lending and for mortgage lending. While they both have the same 350-850 scale, you could get two different numbers, perhaps a 680 from one and a 720 from the other simply because they are designed to measure risk for different types of lending.
• Each business determines what scores are acceptable and set cut-off points based on their unique experience and risk tolerance. Even when two businesses use exactly the same credit scoring system, the same score could be “good” to one and “bad” to the other.

So, how do you put context around the score you receive so that you can understand what it means?

Ideally, the lender you are working with can provide an explanation of the score they used during the loan process, what it means for that particular transaction and a list of the factors from your credit history that negatively affected particular score.

However, that is not always possible. Front line people often only receive the decision and don’t know how the decision was made. If your lender cannot provide details about the score you receive, you have a good alternative. Get a credit score and report from a reputable online credit score provider. Admittedly, I am a bit biased, but Experian provides two of the best.

You can get your VantageScore at www.vantagescore.experian.com. It includes a list of the factors from your credit history and an entire Web site of information that explain what it means and how you can improve your score by focusing on the risk factors.

You can also get your Experian Plus Score at www.nationalscore.com. Your Plus Score includes a comprehensive report explaining the score and both the positive and negative factors from your credit history that affect it.

A third possibility is to subscribe to a credit monitoring service, such as Credit Expert, which gives you unlimited access to your credit report, credit score and explanations of what are driving the score. You can then track results as you address the factors to see how the number changes over time.

Any of these scores will give you a very good idea where you stand as a credit risk. While the number from your lender may be different, what it means to them will generally be the same in terms of where you fall in the range of risk.

The most important thing to understand is the list of risk factors that you receive. As I’ve tried to explain, numbers can be very different. But, the risk factors tend to be very consistent from one credit scoring system to another. By addressing those risk factors you can improve all of your credit scores regardless of the system being used.

Thanks for asking.