Understanding Credit Score Algorithms | Amplify Credit Union
 
Find A LocationLocations
Make A PaymentPayments
Popular Pages
Still Need Help?More
>   >
>   >
>   >
>   >
call us email us send us mail chat with us
Call Us
512-836-5901
800-237-5087
Email Us
Click Here
Mail Us
Amplify CU
PO Box 85300
Austin, TX 78708
Live Chat
Click Here
 
Popular Looking For Help? OPEN LOGIN
menu OPEN LOGIN help
help LOGIN
Enter your login ID:
Password:
menu OPEN
 
Understanding Credit Score Algorithms

Financial Advice

IMPROVING YOUR CREDIT

Articles and research about credit scores

Understanding Credit Score Algorithms

Financial Advice

IMPROVING YOUR CREDIT

Articles and research about credit scores

Understanding Credit Score Algorithms

Published December 08, 2017

You know that your credit score is important—it’s a number that lenders use to determine whether they should offer you credit, and what interest rate you qualify for. Whether it’s a credit union, a credit card company, or a car dealership, these lenders will look at your credit report to learn how you’ve managed your finances in the past. After all, they want to be sure you’ll repay your loan on time. In other words, your credit score helps lenders determine the level of risk involved if lending you money.

Your Credit Report

Your credit score isn’t the only thing a lender wants to know about you. There are other aspects of your credit report that are important, such as your total amount of debt, any derogatory items on your report, and the types of credit accounts you have—both present and past.

Many factors can influence your credit score. The most common credit scoring factors on your credit report are:

  • Your payment history. Your credit score will reflect the on-time payments you make as well as late or missed payments. Payment history is the most highly weighted factor used to calculate your credit score.
  • Credit utilization ratio (capacity). This compares the total amount of credit you’re currently using with the total amount of credit you have available. For the best credit score, you want to keep your balances less than 30% for each account. For example, if you have a credit card with a $10,000 limit, be sure to keep the balance for that card below $3,000.
  • Total debt. This is the sum of all of your debts, including loans, collections, credit cards, and other credit accounts.
  • Credit mix. This looks at the different types of credit accounts you’re using (such as a mortgage, an auto loan, a credit card, store credit, etc.).
  • Account age. Lenders want to see an established history with on-time payments — and how old your credit accounts are is important.
  • Hard inquiries. When someone runs a credit check on you, this is known as a hard inquiry.
  • Public records. This can include tax liens, bankruptcies, or civil judgments.

You Have More Than One Credit Score

Credit is an intricate subject, and to further complicate matters, you might be surprised to learn that you have not only more than one credit score, but you also have more than one type of credit score.

FICO vs. VantageScore

FICO and VantageScore are two popular credit scoring methods. They each use different algorithms to calculate credit scores.

The VantageScore credit scoring model was first introduced in 2006. VantageScore was developed as a joint effort by Equifax, Experian, and TransUnion to create more predictive and consistent credit scoring. Your VantageScore is determined by evaluating your credit report, weighted as follows:

  • Recent credit amount: 30%
  • Payment history: 28%
  • Credit utilization: 23%
  • Account balances size: 9%
  • Depth of the consumer’s credit: 9%
  • Amount of available credit: 1%

A FICO score is a credit score first introduced in 1989 by FICO (the Fair Isaac Corporation, known in 1989 as Fair, Isaac, and Company). The FICO model is used by the majority of lenders, and is based on credit scores from Equifax, Experian, and TransUnion. Your FICO score is determined by evaluating five sections of your credit report, which are weighed as follows:

  • Payment history: 35%
  • Outstanding debts: 30%
  • Length of your credit history: 15%
  • Types of credit you’ve used: 10%
  • Amount of new credit: 10%

Credit Bureaus

In addition to the two credit scores we’ve already discussed, you also have a distinct credit score with each of the credit reporting agencies: Equifax, Experian, and TransUnion. Your credit score with each of these agencies is likely very similar; however, it is possible there may be some discrepancies.

For example, I paid off my car in 2015. TransUnion and Experian show the loan as having been paid off, but Equifax didn’t update the information on the loan after it was paid off and the account closed, so that debt still appears on my credit report. In this case my Equifax credit score would be lower than the scores from TransUnion or Experian.

Different Types of Credit Scores

Believe it or not, there’s even more to your credit score than all of this! Each bureau has its own name for its credit scoring model—even though they use the same FICO algorithm. Experian calls it “FICO or FICO II,” Equifax uses “Beacon,” and TransUnion’s model is named “Empirica.”

Additionally, there are specialized credit scores that lenders use for specific types of loans. For example, if you’re applying for a car loan, a lender will look at your Auto Enhanced score—this type of score gives more weight to how you’ve paid previous auto loans. In other words, if you paid your mortgage and credit cards payments in full and on-time yet your car loan payment was always late, that would be reflected in your Auto Enhanced score.

Conclusion

All this information probably seems overwhelming. So, we have two pieces of advice for you:

  1. Keep track of your credit score. Regardless of whether you use a free service like Credit Karma or pay for a subscription like MyFICO, regularly checking your credit report can help you discover mistakes or fraud. We recommend checking your credit report at least twice a month. This way, you can take action if you notice something out of place. Since clearing up discrepancies on your credit report can take months in some cases, you’ll want to deal with any issues as soon as possible.
  2. Learn which credit score your lender uses, and then focus on that score. For example, let’s say you are looking for a personal loan. Ask your lender which credit score they will use before you apply for the loan. If you find out they use the Beacon score, you’ll know to look at your Equifax score.

Our Personal Bankers can assist you with any additional questions you may have regarding credit scores and their importance for your real estate loan. Please call 512-874-7171 or click below to get started today!



Careers  |   Forms & Disclosures  |   FAQ  |   ADA Notice  |   Privacy & Security  |   NMLS# 530487  |   Routing Number: 314977227
VISIT US: Like us on Facebook Connect with us on Google+ Follow us on Twitter Connect with us on LinkedIn Watch us on YouTube Equal Housing Lender