Many different types of credit scoring models have been developed by different companies (such as VantageScore and FICO), and lenders use these credit scores when they are evaluating your application for a loan or credit card. No two lenders are guaranteed to use the same type of score, and sometimes they may even use multiple scores to get a better idea of your risk as a borrower.

You might be surprised when you check your score at home, and find out that a lender who has checked your credit has a different number. However, this is normal. We’ll take a look at some common reasons why so many different credit scores have been created.

Every Score Has A Different Use

When you hear the phrase “credit score,” this is actually a somewhat broad term. The normal base consumer credit score (the one that you’re used to seeing when you check your own credit) was developed in order to help lenders predict how likely you are to pay back your loan or make payments on your credit card. The higher this number is, the more likely you are assumed to actually pay back your debt. Extremely low credit scores are viewed as risky, and you may get extremely high interest rates or you may not even qualify for credit at all in some instances.

In addition to these generalized consumer credit scores (base scores), there are also separate industry specific credit scores which are used for evaluating your risk when you apply for loans like car loans or mortgages. These specialized credit scores will use the same basic information from your credit report, but the individual data points will be weighted differently.

For example, if you have a history of making late payments on an auto loan, or you’ve defaulted on an auto loan, your credit score used by lenders when you apply for another auto loan in the future will be lower than your normal base credit score. This is because your credit score for the auto loan industry takes into account your history with past auto loans more heavily than other types of accounts on your credit report.

Scoring models based on your credit report are also used as a way to predict risk in other types of industries. For example, the information in your credit report can be used to develop a score to predict how likely you are to declare bankruptcy, or perhaps how much revenue you will generate for a bank as a credit card holder. Credit scores are even used in the insurance industry to determine whether you are insurable, and can affect how much your premiums will be.

Competition Between Companies

Another reason that so many credit scores have been developed is because companies compete against each other to try and develop better, more accurate credit scores which they can sell to credit bureaus. Credit scoring companies compete to have the best credit scoring model, because lenders need to use this information to determine who qualifies for a loan, and at what interest rate. As a loan provider, this could significantly affect your profitability.

The two largest and most popular consumer credit scoring companies are FICO and VantageScore. If you’ve ever checked your credit score through a major bureau, your bank, or a credit monitoring service then you have probably seen these scores. It is common for the major credit bureaus to provide VantageScore and FICO scores to consumers and lenders, but credit bureaus have also developed their own proprietary credit scoring models.

In addition to this, creditors and lenders have even developed their own credit scoring models! In order to offer more competitive interest rates and win over your business, lenders must be able to make the most accurate assessment of risk when they evaluate your credit. This has driven lenders to put significant resources into researching the most accurate way to predict your ability to pay back debt - and sometimes this means developing their own credit scores. Having more accurate credit scoring models also helps them avoid lending to consumers who do not end up paying back their debt.

Multiple Versions of Scoring Models

To add yet another layer of complexity to the credit scoring industry, each credit scoring company maintains different versions of their credit scores. For example, there is a VantageScore 3.0 as well as a VantageScore 4.0 which are both used today. VantageScore has released four different versions of its credit score since 2006.

FICO scores are currently on versions 8 and 9, although FICO 9 hasn't been adopted widely in the industry yet. FICO has regularly updated their credit scores since the company was created in 1956. Some of their scores are even designed to work only with a single credit bureau such as TransUnion, Experian, and Equifax.

Conclusion

Financial lending is a competitive industry, and banks and lenders want to be as accurate as possible when they determine who to give loans, and what interest rates to provide. This has led to the creation of so many different credit scores, and as time goes on we will probably see the number of credit scoring models go up. The good news is that you can still focus on the same core principles if you are trying to improve your credit: make your payments on time, don’t borrow more than you can afford to pay back, and keep a low balance on your credit cards. If you do those things, then you will have a great credit score no matter which model is used to calculate it.

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