Man, this whole credit thing feels like something that definitely should have been a part of your high school curriculum. First, you had to learn about a credit score, and now you’re hearing there are three of them. Did anyone plan on teaching you this? Probably not, but that’s where we come in.
So many questions can pop up once you start to uncover all there is to learn about credit scores. You may start to wonder things like:
- Why your TransUnion score is lower than your Equifax score?
- What score will help you get a better interest rate?
- What other credit scores need to be on my radar?
Let’s work through it all step by step, starting with the credit bureaus.
What Are Credit Bureaus?
Credit bureaus, also known as credit-reporting agencies, are where most of your credit history is compiled.
Whenever you use credit, your lender will keep track of your utilization, payment history, and several other factors as a way to classify what kind of borrower you are. Lenders then report this information to credit bureaus.
Credit bureaus take all of the data given to them from your open accounts and create a credit report. Your credit report is sort of like the “permanent record” of your credit use.
You may have heard that there are only three credit bureaus, but there are actually dozens. There are many small credit bureaus across the nation, and in the past, there were many more. As time goes on, the small bureaus are being bought and taken over by one of the three major ones: Equifax, Experian, and TransUnion.
Credit Reports Vs. Credit Scores
Your credit report is like any other report card; it lists what you’ve done and how well you performed. If you’ve opened up a credit card, taken out a loan, or done anything that requires credit, bureaus will add your actions to your credit report.
Each time you use credit, it’s listed under a new account, and every account impacts your score.
Your credit score is a number created based on all of the data on your report. An algorithm inputs all of the information from each of your accounts and creates your score.
So why do you have three different credit scores if there’s only one you?
Why Are Your Credit Scores Different?
Your vast experiences with credit can make credit score calculations complicated. Sometimes, your credit scores vary because of simple calculation or reporting errors, but there are three innocent reasons why your credit scores may differ:
- Your scores aren’t updated simultaneously: Your credit score can change at any time depending on when they receive any new information on your activity. To accurately compare your credit scores, it’s best to look at them from the same date.
- Scores are calculated using different scoring models: Because there are so many credit bureaus, there are many different credit scoring models. Each model may result in a different score. Fico vs. TransUnion, VantageScore vs. Equifax, they’re all different.
- Not every credit bureau has the same information: Some lenders and creditors report to all three major credit bureaus, but others don’t. If your credit use is only reported to one or two bureaus, then some of your scores may be calculated using less information.
Because each credit bureau updates your credit score at different times and has different information and algorithms, you’re going to see different scores.
The big three bureaus don’t share information with each other and don’t use the same models, which creates the different credit scores that you see. So, what are those differences?
The Difference Between Each Credit Score
Generally, all of the credit bureaus have a majority of the same information (or at least the most important details). The big differences in your credit scores come when the bureaus begin implementing their different scoring models.
Each scoring model applies differing weights and algorithms to the information on your credit report. There are hundreds of variations to this calculation, meaning there are hundreds of ways your score can come out. Some bureaus use their own credit scoring models, while others use a VantageScore or FICOscore.
FICO and Vantage are just different brands of credit scores like Kleenex and Puffs are different brands of tissues. The difference between a “FICO score” and “credit score” is that a FICOscore is a brand name (like Kleenex) while a credit score is an overarching description (like tissues). Different brands have different formulas, so their products are ever so slightly different.
Fun Fact: there are at least 16 versions of the FICO Score alone.
Let's use a hypothetical example to make things a bit clearer on the differences between these scoring models. Say you have a credit card, medical debt, and student loans. TransUnion’s algorithm may place more weight on your student loan than on your credit card utilization, while FICO may calculate your score giving your credit card greater significance. Because of differences like this, your credit scores are different.
Which Credit Score Should You Pay Attention To?
If you want to keep an eye on your credit score but aren’t sure where to focus, take a look at the one that’s most accessible to you. When it comes down to it, stressing over each of your credit scores and why they differ is pointless.
Instead, put your focus towards creating a solid credit history. No matter what algorithm is used, you can’t have a poor score if only good actions are being reported to the bureaus. Teach yourself the basics of what goes into a credit report and work on those factors.
When you’re doing everything right and using credit responsibly, there’s no need to stress all of the different credit scores that are out there. To learn more about best practices when handling credit, check out the Extra blog.