Improve Credit Scores

(Excerpt from BestCredit: How to Win the Credit Game, 2nd ed., Chapter 3)

FICO's decision to release detailed information about its credit scoring model in 2002 came as a result of intense pressure from Congress and consumer advocacy groups. It has given consumers a significant leg up. Now we don't have to make as many guesses about how to improve credit scores. For example, in the past it was assumed that a person's age played a role in scoring. This was a reasonable conclusion, since older people had better scores overall. But in reality, it's the age of the credit report that matters—an important difference. New knowledge such as this can prove very powerful in devising individualized tactics and strategies for improving credit scores.

Credit scores are derived using software that analyzes the data contained in a report. This software uses algorithms to come up with a solution for analyzing a finite number of variables. One big advantage to this is that everyone is treated equally by the software, as the software does not discriminate as people sometimes do; it is indifferent to someone's religion or hairstyle, for example.

Don't be alarmed when you order your credit reports and find that your credit scores from each of the credit bureaus are different. The discrepancies can be attributed in part to the fact that certain accounts either don't show up on each report or are reported differently. It's also because the bureaus use different scoring models. Equifax uses the FICO score, while Experian and Trans Union use their proprietary models. Yet you can obtain a FICO score for each of the individual credit bureau reports directly through the consumer arm of FICO, myFICO (www.myfico.com) or one of its affiliates. There are many FICO affiliates, though by purchasing from All3Reports (www.all3reports.com), you're supporting a BestCredit partner.

In addition to the FICO score, which Equifax markets under the name Score Power, the other two credit scoring models used by lenders are Trans Union's TrueCredit and Experian's Plus Score. To illustrate how confusing this can get, compare the following scores, all calculated for the same individual in the same hour (and note how each compares to the FICO score calculated for the same set of data):

Experian/Plus Score (Range: 330-830)
Plus Score: 702
(FICO Score: 711)

Equifax/Score Power (Range: 300-850)
Score Power: 687
(FICO Score: 687)

Trans Union/TrueCredit (Range: 400-925)
TrueCredit: 644
(FICO Score: 688)

At first glance, the different scoring ranges might appear to be an issue, but upon further examination, Experian's scoring range is 500 points (330-830), versus 550 for Equifax/FICO (300-850) and 525 (400-925) for Trans Union. Experian's Plus Score has nearly the same range as the FICO, so it's basically a wash, and Equifax uses FICO, so range is not an issue there. The big discrepancies and problems arise with Trans Union's proprietary score. If the scoring algorithms are indeed similar, then the TrueCredit score should be around 770, not 644. The range of the TrueCredit score is 525 points, while the range of the FICO score is 550 points. Though I'm no mathematician, I simply took the 688 Trans Union FICO score and converted it to 388/550, which is 70.54 percent of the range. Using the TrueCredit range of 525, I then took the 70.54 percent of the 525 range, ending up with 370, and added it to the 400 TrueCredit floor for 770. (Although this doesn't take into consideration that the starting point is 400 for TrueCredit versus 300 for FICO, it's close enough for government work. It serves to illustrate the main point, which is that TrueCredit's score doesn't jive with FICO's at all, falling within what TrueCredit considers to be a poor range, while the FICO score for that same report falls within what FICO considers a good range.) From what I've seen based on my own observations and anecdotal evidence, it appears that TrueCredit assigns derogatory history more weight than FICO does overall, since FICO is more forgiving over time, placing more weight on recency of lateness.

Of course, this is just one set of scores, so my research method doesn't exactly qualify as scientific. On the other hand, this example is useful for demonstrating that differences can exist. Fortunately, few lenders use Trans Union's TrueCredit score. As such, don't get hung up on it. It's the FICO score that consumers should be most concerned about, since it's the one the majority of lenders look at in determining creditworthiness. Besides, if you can get your FICO score to within acceptable levels, then the other scores will likely follow suit. Gear your efforts toward FICO, and you'll come out ahead in the long run.

As an aside, the bureaus also each have a proprietary FICO score. Equifax is known as Beacon, Trans Union is known as Empirica, and Experian is known as Experian/FICO Risk Model. Of course, Equifax's Score Power is basically the same thing as a Beacon; the others are not made available to consumers, though lenders may obtain Trans Union's Empirica and the Experian/FICO Risk Model scores when they pull consolidated reports.

Lenders use the FICO score primarily as a tool for early detection of potential credit problems. By analyzing past data, they believe they can predict future results.

This has some merit, but as with all computer algorithms, the FICO score isn't without flaws. Unfortunately, that's outside your control. For now, all you can do is play along. The name of the game is improving your score.

Figures 3 & 4.

Figures 3 and 4: Copyright © 2005 Fair Isaac Corporation. Fair Isaac, the Fair Isaac logo, and the Fair Isaac product and service names are trademarks or registered trademarks of Fair Isaac Corporation.