People are frequently confused about the difference between common credit terms: bureaus, reports, files, history, score, rating agencies, etc.
The bewilderment grows when a credit score they get from a website does not match what the lender pulls when evaluating a new account application.
The befuddlement is understandable. First, the industry uses overlapping terms. Second, the agencies perform multiple roles. Finally, the underlying data behind the reports and scores change every day.
Therefore, begin by learning the important terms by contrasting each key concept. Then apply these lessons to understand why consumer credit scores rarely match what your lender pulls at a later point in time.
Credit Bureaus Versus Rating Agencies
The first topic to explore is the difference between credit bureaus and the rating agencies. This is sometimes a difficult distinction to make. Each entity offers a diverse set of services that frequently overlap.
Therefore, we present the primary role actors play in the market and ignore their secondary roles. Simplicity helps with clarity.
Three bureaus dominate the market in the United States although many other companies operate in niche markets. The primary role of the credit bureaus is to output a report when a lender wants to make an underwriting decision.
The credit bureaus each perform similar functions behind the scenes in order to produce their reports. However, each one uses distinct systems and business processes to make these things happen.
- Collect borrowing and payment information from contributors
- Perform data hygiene and standardization steps
- Combine information from multiple sources into a single consumer record
- Update the data after lenders complete billing cycles
- Communicate the file to customers after an inquiry
The primary role of the credit rating agencies is to develop predictive algorithms based on the information presented by the bureaus in their reports. These mathematical equations (scores) help lenders project the probability of future delinquencies and losses on a new borrowing account.
- Fair Isaac Corporation is the leading credit rating agency. They produce and market the FICO score, MyFICO, and a host of other decision support services.
- VantageScore Solutions is the second significant credit rating agency. They are a joint venture between Equifax, Experian, and TransUnion. The three bureaus formed this joint venture to offer the market an alternative to FICO.
Royalty payments are the key departure point to keep in mind. Fair Isaac charges the bureaus a royalty fee each time they provide a Fair Isaac service to a customer. The Vantage royalty fees are much smaller because the bureaus co-own the rating agency.
Keep this financial arrangement in mind as we explore other key distinctions later in this article.
Credit Report and Score Differences
The second topic worth exploring is the difference between credit reports and scores. It is very easy to confuse the two concepts.
A report contains raw information while the credit score offers a prediction of future behavior based on information in the report.
The big three bureaus noted above provide consumer credit reports. A credit report is a file about a particular person, which contains the borrowing and payment history for that individual.
The terms consumer credit report, file, and history mean the same thing. They represent of record of raw information about an individual. These are the basic components.
- Identity Information
- Names including first, last, middle, maiden, and married
- Suffixes such as Junior, Senior, II, III, etc.
- Current and previous addresses
- Date of birth
- Social Security Number
- Borrowing and payment history
- Account open and close dates
- Principal amounts, balances, and account limits
- Payment status such as current, 30-days late, charge off, etc.
- Collection accounts
- Public records such as liens, judgments, bankruptcy
A credit score is a mathematical equation that reads the raw historical information from a single consumer report and makes a prediction about that person’s future behavior. Lenders use the prediction of future behaviors in order to make consistent underwriting decisions – regardless of the bureau source.
The rating agencies develop credit scores to predict a variety of future behaviors – not just one. The variety of objectives can clear up lots of consumer confusion.
- FICO is the leading general-purpose credit score.
- It predicts the likelihood of delinquency on any obligation
- During the next 18 months.
- Vantage is a second general-purpose credit score
- It forecasts the probability of delinquency on any obligation
- Within the next 18 months
- Mortgage credit scores are home loan overlays.
- They forecast the percentage of delinquency on a home loan
- Automotive credit scores are car loan overlays
- They predict the future delinquency level for car leases and loans.
- Insurance credit scores transcend the industry
- They predict the propensity of an individual to file an expensive claim
- Against an auto or homeowners insurance policy
FICO vs Credit Score
The difference between a FICO score and a credit score is like comparing Kleenex to store-brand tissue paper. They both serve the same purpose. However, the original brand name became synonymous with an entire industry category.
- FICO is the original branded score. It is the most well know rating system that relies on information on a consumer report to make predictions about future behaviors. FICO scores predict a variety of outcomes.
- Auto loans
- Home loans
- Home & auto insurance claims
- Other credit scores have lesser-known names (Vantage) or adopt store branding (Beacon). They also use the same data on consumer reports to predict similar future outcomes.
- Auto loans
- Home loans
- Home & auto insurance claims
Credit Scores Differ at Lenders and Websites
Credit scores are different at websites compared to when a lender pulls it because of timing changes bureau processing variations, and faulty assessments.
Do not assume that accuracy means similarity. With all the nuances, it is very difficult to make a valid one-to-one comparison.
Timing is the universal reason why credit scores are different between any two sources. The underlying data changes constantly. The bureaus process updates every minute of every hour of every day including weekends and holidays. The equations are dynamic not stored. Each new inquiry means a new calculation and result.
Therefore, inquiries just minutes apart could result in new information that could affect the second request. Many consumers wait days or weeks and then wonder why they are not the same.
Credit scores are different at the big three bureaus for an odd reason. The rating agencies design the equations to mean the same thing regardless of which bureau supplied the underlying report. This allows customers (banks, auto finance companies, and mortgage lenders) to make consistent underwriting decisions.
Equifax 650 = Experian 650 = Transunion 650 = X% delinquency rate
Combining data together from thousands of sources is not an exact science. Each new source introduces new anomalies. The equations must adjust to the unique ways each bureau addresses this enormous matching challenge.
The consequence is that the equation result is rarely the same for any individual at all three bureaus.
Credit scores are different from what the lender pulls for all of the reasons mentioned earlier. However, the nuances are unique for several lender types: banks, car dealers, and mortgage companies.
People encountering financial difficulties often prioritize which bills to short pay.
- Unsecured accounts have the lightest consequences of non-payment
- Auto loans in default can result in repossession and lost transportation
- Mortgages in default lead to foreclosure and loss of a home
Credit scores are different from what the bank pulls mostly because of the royalty issues associated with the general-purpose equations. Vantage royalties are much lower to the bureaus (since they jointly own the company).
In this area, people are frequently comparing apple varieties.
- Vantage general-purpose scores are most popular for consumer education needs. The low royalty structure makes it easier for websites and the bureaus to promise free services – at least during the introductory period.
- FICO general-purpose scores are most popular with lenders. They have been around longer. Banks and finance companies are reluctant to move away from a tool they understand and trust.
Car Dealer Pulls
Credit scores are different from what the car dealer or auto finance and leasing company pulls because of the unique forecasting objective. They are less concerned with whether someone falls behind on unsecured revolving account payments.
Car dealers and auto finance companies care about whether they will eventually need to repossess your vehicle for non-payment. Therefore, they use a specialty equation.
In this area, consumers are often comparing apples to oranges.
- The regular Vantage consumer education score predicts payment performance on a broad set of accounts. It is most sensitive to unsecured obligations since they become delinquent more frequently.
- A FICO automotive score forecasts future payment activity for an account secured by the person’s transportation. This behavior is quite different.
Mortgage Company Pulls
Credit scores are different from what mortgage companies pull because of the narrow objective and special requirements. The larger principle amounts add an extra wrinkle.
Home lenders are less concerned about possible non-payment of other accounts that do not result in foreclosure. They also utilize a specialty equation.
In this area, consumers are also comparing apples to oranges.
- Regular Vantage consumer education scores have broad objectives.
- FICO mortgage overlay scores predict payment behavior on home loans.
Government agencies (FHA, USDA, VA) and government-sponsored enterprises (Fannie Mae, Freddie Mac) require mortgage companies to pull three results and pick the middle number.
Free credit scores at Credit Karma are often different because of the timing and specialty equation issues already discussed. In addition to these reasons, they often introduce sourcing variations (bureau and rating agency).
Credit Karma provides the low-royalty Vantage rating sourced from either Equifax or TransUnion. They do not provide the high-royalty FICO equation or source from Experian.
- Versus FICO – the two results are often very close because the model objectives (Vantage and FICO) are the same: future delinquencies on any account. However, the source does not match 1/3 of the time.
- Versus Experian – the source data is never the same even though both entities prefer to output the Vantage rating. An Experian FICO rating would add a second layer of variation.
- Versus Equifax – the two Vantage offerings should be close because the source is the same. An Equifax FICO rating would show minor variations since the objective is similar.
- Versus TransUnion – the comparison is the same as above.