Credit Reports vs. Scores

Credit reports can be several pages long, so it’s not surprising that credit scores were developed as a sort of shorthand—and as a more objective way to evaluate consumers.

In order to determine your credit score, some of the information in your credit report is fed into a mathematical formula, which spits out the three-digit number that lenders use to predict whether you are likely to pay back a loan (or a credit card debt) in full and on time.

As we’ve noted, supporters of credit scoring point out that it has created more uniformity in lending, in part by removing the subjective human factor. Instead of having loan officers look over your credit report and application—filtered through their own judgments, experiences and biases—the process is now largely automated.

What’s more, many lenders now rely on the same criteria in judging applicants for credit, where in the past each lender might have had its own (often conservative) method for determining a consumer’s creditworthiness. But there are still complaints.

According to an article in the Philadelphia Federal Reserve Bank’s newsletter, Cascade:

Opponents argue that an automated system will not consider the unique needs of low-income and other nontraditional borrowers. As a result, opponents believe, loan denial rates will increase.

As we’ve noted, Fair, Isaac & Co. invented the most widely used credit score program. Its proprietary formula is used by most creditors to determine the so-called FICO score, though there are other formulas that have been created for different purposes.

The Big Three credit bureaus all use the FICO formula to compute credit scores, but each calls that score by a different name. Equifax calls it the Beacon score. Experian calls it the Experian/Fair Isaac Risk Model. And Trans Union calls it the Empirica score.

Next: What Makes a Credit Score