Trying to explain how a credit score is actually calculated is like explaining why the sky is blue to a 4-year-old. Impossible.
And the credit industry is not helping their own cause.
On Friday, the New York Times' Bucks Blog called out FICO, which compiles the most widely used scores, for a lack of transparency in a recent well-publicized survey that claimed credit scores were on the rise.
The survey, which FICO published last week, showed that the number of consumers with FICO scores over 800 is at its highest level since 2008. The company did not explain they used a newer version of their credit scoring formula called FICO 8, rather than the older FICO, in their analysis. The newer score has the same scale as the original, but it is a more forgiving rating method and could move scores up by as much as 20 points. Both FICO scores are based on a 300 to 850 scale.
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If this feels like splitting hairs, it's not. For consumers, this obscurity adds an additional layer of confusion to an area that is already something of a black box. Some lenders use FICO, some use FICO 8 and others use a VantageScore. To make matters even more confusing, the credit reporting companies (e.g., TransUnion, Experian and Equifax) can also give other brand names to these scores. FICO told the NYT that more than 7,600 creditors use FICO 8, including Citibank's credit card unit.
Both FICO and VantageScore have their own scale and formulas for creating a score. For example, a 660 FICO score, based on a 300 to 850 scale, is relatively higher than a 660 Vantage score, which is based on a scale of 501 to 990. Variables such as the number of recent credit inquiries, late payments, liens, debt-to-income ratio and so forth all impact a credit report and score on an ongoing basis.
According to the NYT, the company defended the report's findings and said the upward trend remained, regardless of whether it used FICO or FICO 8 in its analysis.