Understanding Your FICO Score And Its Variances

The main system in place for determining credit scores is called FICO, an acronym for Fair Isaac Credit Organization, which is the company that owns this formula.

The three credit bureaus, Equifax, TransUnion, and Experian all use this system to establish credit scores, but they each market it under a different name. Equifax markets their product as Pinnacle; Experian as the FICO Advance Risk Score; and TransUnion as Precision. It is important to be aware of these names, and to note that all of these products employ the same formula for establishing credit score.

The notable differences in the different products marketed are due to slightly differing data that each of these bureaus collects on any given individual or business's borrowing habits. These bureaus are competitors, and work independently of one another. Certain aspects of one consumer's credit history may not be reported to all three, and thus may be missing from one or more bureau's data. Likewise, contested aspects of a credit history may not be removed as requested from all of the bureaus.

This is the largest reason for differing information from each bureau. Additionally, many consumers do not take an active approach to managing their credit score. The unfortunate result of this is that incorrect information is not at all uncommon on credit reports. It is essential for any fiscally successful individual or business to be aware of the information being reported on their credit reports for this very reason. Again, even in the case of incorrect or disputed items, it is not always the case that all three bureaus will remove the discrepancy.

When discussing variances in credit scoring, it is also important to note that scores may differ depending on the reason for which they are being generated. A report generated for a mortgage may be slightly different than one for a car loan, etc. This is because these different elements of the finance industry have different standards and requirements for lending money.

Another important distinction to make when looking at your FICO credit report is the difference between credit score and credit rating. These terms are not synonymous as most consumers believe. The credit rating is a letter grade assigned from A to D, with + and connotations in between. It is based on a number of factors, one of which is the credit score, but other factors include your current financial situation and your history of debt management and payment and other borrowing practices.

The credit score, however, is based on five factors that have very specific weight in their importance. The most heavily weighed of these factors is payment history. This is considered to be the most significant indicator of an individual's risk. FICO assigns 35 percent weight to this element. The second most heavily weighted item is outstanding debt. This is considered to be the most significant indicator of your current fiscal health, and is assigned 30 percent weight.

The other factors in descending order of importance are the 'age' of your credit history (how long you have been establishing credit), types of credit currently issued to you, and the amount of recently opened or established credit.

Being aware of these different terms and variances in your credit report are essential to a fiscally fit individual or business.

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