Understanding credit scores

Types of Credit Scores

There are primarily two types of credit scores: generic scores and custom scores. Generic scores may be used by many types of lenders and business to determine general credit risk. Custom credit scores are developed for use by individual lenders, who rely on credit reports and other information, such as account history, from their own portfolios. Custom scores are unique to that specific business's. There are also credit scores for specific types of lenders, such as credit unions, and for specific types of lending, such as mortgage lending or auto lending.

VantageScore®

VantageScore® is the first generic credit score developed cooperatively by Experian and the other national credit reporting agencies. This score uses the same formula across all three credit reporting agencies.

Why Lenders Use Credit Scores

Before credit scores, lenders physically looked over each applicant’s credit report to determine whether to grant credit. A lender might have denied credit based on a subjective judgment that a consumer already held too much debt or had too many recent late payments. Not only was this time-consuming, but human judgment also was prone to mistakes and bias. Lenders used personal opinions to make a decision about an applicant that may have had little bearing on the applicant’s ability to repay debt.

Today, credit scores help lenders assess risk more fairly because they are consistent and objective. Consumers also benefit from this method. No matter who you are as a person, your credit score reflects only your likelihood to repay debt responsibly based on your past credit history and current credit status.

Understanding Credit Scores

Credit score factors are the elements from your credit report that shape your credit scores. For example, your total debt, types of accounts, number of late payments and age of accounts affect credit scores. Such factors indicate what elements of your credit history most affected the credit score at the time it was calculated.

Understanding the credit score factors is the key to improving your credit scores. The factors tell you what you must address in your credit history to become more creditworthy over time. Credit factors usually are consistent from one credit score can help you improve all credit scores.

How a Good Credit Score Is Determined

Developers of credit scoring models review a set of consumers — often more than 1 million. The historical credit profiles of these consumers are examined to identify common variables. The developers then build statistical models by selecting the credit variables most predictive of future behavior and assigning appropriate weights to each variable.
The score is influenced by several factors: