What Exactly is a Credit Score, Anyway?

As part of my ongoing Ask an Expert Series, I had the opportunity to speak with Pamela Paulson of Home Loans Assist, a company dedicated to helping clients repair their credit. At VanDyk Mortgage, when we have a deal we can’t do due to the borrower’s credit score, we consult with Home Loans Assist to help our clients improve their credit and (hopefully) qualify for a home loan. Here’s a breakdown of what we discussed.

Paying for everything with cash has its advantages, but eventually, you’ll need to use credit to buy something — and that requires a good credit score. A solid credit score will net you lower interest rates on credit cards and loans, increase your chance of approval for loans and rentals, give you wiggle room in negotiations, and help you with everything from buying a cellphone to maintaining low car insurance premiums.

But what exactly is a FICO score? FICO stands for Fair, Isaac, and Company, essentially a group of mathematicians and statisticians who sit around creating algorithms to assess a consumer’s creditworthiness or credit risk. Over 50 of these algorithms have been created over FICO’s existence, but only three are used in the mortgage industry. The three scoring models are called Beacon 5.0, Classic 04, and Fair Isaac Version 2. Beacon is tied to Equifax, Classic to TransUnion, and Fair Isaac to Experian. When a lender pulls a credit score to assess your creditworthiness, these three scores get “tri-merged” and rolled into a single report.

Each of these three algorithms assesses different things based on the consumer’s payment history, amounts owed, balances, length of credit history, and many other metrics specific to the consumer. But if two different companies pull your score on the same day, those scores should be identical — although credit scores definitely change over time.

Credit scores are certainly a complicated subject with a lot of moving parts. But with the right expert by your side, you can navigate the tricky land of credit without issue, even recovering your credit score. To learn more, or to watch the rest of the series, visit http://bit.ly/FICOscoreVDM.