Understanding Credit Scoring Models


By Bob Schroeder

Not all FICO scores are created equally. And what about FAKO and Vantage scores? A 700 score may be excellent according to one model and merely average according to another. What’s worse, even A-rated scorers may be on the verge of bankruptcy. A lending expert helps navigate the murky waters.

As I travel around credit union land, I find members and credit union staff confused about credit scores. A member who purchased his credit score online is told he has a 900 credit score, while the highest score the credit union has ever seen is 850. The member is quite disappointed to find out the credit score used by the credit union is 823. When I was asked to write an article, I thought a discussion to clarify the different types of credit scoring models available to lenders and consumers would be beneficial. Knowledge is the first step to clearing the confusion. Due to space constraints, I will not be able to address all the models in this article. My hope, however, is that after reading this article credit union staff members will have a better understanding of credit scoring models and that they will feel confident in discussing such models with their members.

The Fair Isaac Corporation (FICO) first introduced credit scores in 1989. Today there are many credit scoring models available from several providers. The same scoring model may produce different results with each of the credit reporting agencies (CRAs), because the information contained in the credit file may be different. Different input data will result in a different output. FICO scoring models are marketed by each of the three CRAs using names such as Beacon and Empirica. All of this can be quite confusing for members and credit union staff.

The purpose of the FICO score is to measure the chance of a 90-day delinquency in the next 24 months. FICO scores are by far the most widely used by lenders, and the FICO Classic scoring model is the most widely used FICO score. It is estimated that FICO has a 90 percent market share of the lender’s business.

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