Why Are There So Many Credit Scores?

Most lenders today rely on your FICO credit score to determine whether to approve your application for a mortgage and when assigning an interest rate to your loan. Generally, the higher your FICO score, the lower your interest rate.

Most lenders consider a FICO score of 800 or more to be excellent. You can expect to earn the lowest interest rate when your score is that high. But you don’t need an 800 FICO credit score to qualify for a mortgage. You can usually secure a loan even if your FICO score is as low as 620.

But did you know that FICO scores aren’t the only credit scores out there? And did you know that you have more than one FICO credit score?

But who's keeping score?
Why don’t you have just one credit score? It’s because different lenders want to measure several aspects of your financial health. For some lenders, your history of on-time payments is the most important factor. That’s why mortgage lenders focus on FICO scores — on-time payments have the most weight in a FICO score.

Other lenders, though, care more about how much you spend in an average month or how much debt you typically carry. Auto lenders and lenders that originate personal loans might not care as much about the same financial habits as do those closing mortgage loans. Because of this, lenders have a variety of credit scores from which to choose.

More than one FICO score, too
Each of the three national credit bureaus — Experian, Equifax and TransUnion — maintains a FICO score on you. These scores will be similar but might vary by a few points. When you apply for a mortgage, your lender typically uses the middle of your three scores when determining your interest rate.

Say you have credit scores of 800 from Experian, 780 from TransUnion and 790 from Equifax. Your lender will use that 790 score when determining your interest rate.

VantageScore
While FICO is the best-known credit score, its biggest competitor is VantageScore. Experian, Equifax, and TransUnion jointly developed this credit score. According to the credit bureaus, lenders, financial institutions and landlords can use this score to determine how likely it is that borrowers will pay their rents or make their payments on time.

Car insurance
Auto insurers typically use their own credit scores to help determine how much you’ll pay for auto insurance. Companies that provide auto insurance say that drivers with higher credit-based insurance scores tend to cost less to insure.

What you should focus on
That’s just a snapshot of the many credit scores that lenders and financial institutions use. What you should focus on is developing strong financial habits that will lead to a good credit score no matter what model lenders and banks are using.
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The most important step to building a strong credit score is to pay your bills on time. Certain payments, such as those you make for your mortgage loan, auto loan, personal loan and credit cards, are reported to the national credit bureaus. Make one of these payments 30 days or more past your due date and your credit score could drop by 100 points or more. If you pay your bills on time every month, your credit score will steadily rise.