CHICAGO, IL--(Marketwired - Oct 28, 2013) - Chances are at some point in your life you have, or will, apply for a mortgage or car loan or credit card. It is likely that the lender obtained your credit score as part of the lending decision. But according to a recent study by TransUnion, many Americans do not understand how credit scoring works or that there are many credit scoring models.
A recent study commissioned by TransUnion asked "On a scale of 1 to 5, indicate your understanding of the different credit scoring models available to you and to lenders" and 26.9 percent of Americans surveyed said "one" or they have little to no understanding, 14.6 percent said "2," and 24.6 percent said "3." Only 16 percent of Americans surveyed said "5" or they had a great understanding of the different credit scoring models.
Credit report scores are often used by lenders as a predictor of how likely you are to repay your loans and is generated by a mathematical formula utilizing the data from your credit reports. Lenders have been using credit report scoring as part of lending decisions for more than 20 years.
The reason that the scores you receive may differ is that each score is dependent on the credit report from each credit reporting company and the scoring model they use.
For example, TransUnion might have not exactly the same information on you as another credit reporting company and vice versa. One credit reporting company may be missing an account that either helps or hinders your score and will therefore report a different credit score than another credit bureau. To get the most accurate picture of your credit health, you want to make sure that they all have the proper information by checking your three free credit reports every year at www.AnnualCreditReport.com.
Additionally, because there are many different scoring models based on different complex algorithms, even if all three of your credit reports contain the same information, your score may vary based on the scoring model used. For example, if a lender obtains a credit score based on a scoring model with a score range of 501 to 990, the score may be 780, while another lender may obtain the credit score using a different model with a range of 300-850 and the score may be only 625. Therefore it is important to shop around when seeking a loan for the best interest rate and options.
"Because lenders have so many scoring models at their disposal, it's rare when the credit score they receive for a consumer and the score you obtain for yourself actually match, and that causes a lot of confusion," said Springer. "So while you do not have control over what scoring model a lender may use, you do have control over the factors -- or the credit behaviors captured in your credit report -- that contribute to whatever score the lender obtains."
Because there are hundreds of credit scores, you should not be overly concerned with the type of score or even the number. Rather, you should monitor changes within a single score. While there are hundreds of different scoring models with different score ranges, most of them take into account the following factors. TransUnion explains how you can work towards healthier credit within each of these factors:
- Payment history: A good record of on-time payments will help your credit.
- Outstanding debt: High balances in relation to your credit limits can lower your credit score. Aim for balances under 35 percent.
- Credit account history: An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application.
- Recent inquiries: When a lender or business checks your credit, it causes a hard inquiry and a slight ding to your credit score. Apply for new credit in moderation.
- Types of credit: A healthy credit profile has a balanced mix of credit accounts and loans.
For more information on how credit scoring works, as well as receive your free credit score by signing up for a 7 day trial as part of your paid TransUnion membership, visit TransUnion.com.
Written by TransUnion Interactive and conducted using Google Consumer Surveys, September 2013. Survey of 807 Americans. Survey results have a 95 percent confidence level.
TransUnion Interactive, Inc. is a consumer subsidiary of TransUnion. As a global leader in credit and information management, TransUnion creates advantages for millions of people around the world by gathering, analyzing and delivering information. For businesses, TransUnion helps improve efficiency, manage risk, reduce costs and increase revenue by delivering comprehensive data and advanced analytics and decisioning. For consumers, TransUnion provides the tools, resources and education to help manage their credit health and achieve their financial goals. Through these and other efforts, TransUnion is working to build stronger economies worldwide. Founded in 1968 and headquartered in Chicago, TransUnion employs associates in more than 33 countries on five continents. www.transunion.com. Follow us on Facebook at http://www.facebook.com/TransUnion.