Understanding the Differences and Lower Scores in FICO vs Other Credit Scoring Systems
When it comes to evaluating one's creditworthiness, different scoring systems may produce varying results, with FICO often being notably lower than other providers' scores. This article aims to demystify why this happens and the nuances behind the differences in credit scoring models.
Introduction to Credit Scoring Models
There are numerous versions of FICO scores, with around 28 different scoring models in circulation. Additionally, there is the Vantage credit score, developed by the credit bureaus and available through platforms like Credit Karma. These scoring models operate on different principles and thus can produce different results.
Why FICO Scores are Generally Lower
A FICO score being lower than a Vantage score can be attributed to several factors, one of which is how each model penalizes late payments and collections. FICO is more stringent in these areas, leading to lower scores compared to the Vantage model.
Differences in Credit Reporting Models
Each credit reporting bureau uses a different scoring model, leading to varying results even for the same individual at any given time. It is impractical to expect consistent scores across different systems. There is no single universal score system that all others would score an individual either higher or lower against.
The discrepancies between scores from different systems can be likened to different judges at a gymnastics meet. Each judge is expected to score the performance based on a set of criteria, but individual biases result in varying scores for the same performance. Similarly, each credit scoring system assesses the probability of a future account delinquency based on past credit history. Factors such as credit history length, past delinquencies, credit utilization, and recent credit inquiries are considered.
Understanding the Science and Art Behind Credit Scoring Models
The development of credit scoring models involves a mix of science and art. While there is statistical correlation between credit history factors and future delinquency, the scoring models must be fine-tuned to optimize accuracy and inclusivity. The process involves decisions on which data variables to include and how to weight their importance, which introduces biases based on the developers' preferences and expertise.
The concept of "bias" here is not about personal preferences but about the subjective assessment of which data measurements would best improve model accuracy and which would make it more compatible with a diverse population. Every additional variable added to the model increases complexity and may weaken the overall strength of the model. Accurately assigning the relative importance of each variable in predicting future delinquency is particularly challenging when considering a large number of variables.
Therefore, the fine-tuning of credit scoring models reflects the biases of the developers, resulting in variations in scores between different models. When comparing two models, such as FICO 8 and Vantage 3, it is expected that a significant number of individuals will have a higher FICO score while a similar number will have a higher Vantage score.
Conclusion
Understanding the differences between FICO and other credit scoring systems is crucial for anyone seeking to improve their credit score. While FICO may sometimes appear lower due to its more stringent approach to certain factors, this does not necessarily reflect a higher risk of delinquency. It is important to review and understand the factors that impact your score and take steps to improve your credit profile accordingly.