You have undoubtedly heard about the importance of maintaining a good credit score, more exact a good FICO score, the score developed by the Fair Isaac Company to determine the creditworthiness of a potential borrower for lenders. In reality, it’s not just about maintaining a good FICO score, it’s about maintaining good FICO scores (plural). All 49 of them.
Yes, you heard me right, there are actually 49 different FICO scores out there. Not to mention the thousands of personal credit scores created by everyone from the Credit Bureaus to Credit Card Companies to Banks.
FICO has many different types of scores, depending on the type of loan you’re applying for. In fact, John Ulzheimer, a credit expert, has created a great chart showing a total of all 49 different FICO scores.
Why so many?
The Fair Isaac Company (FICO) has the basic formula known as the General Purpose FICO, which is used to calculate a consumer’s creditworthiness for all types of loans. The data which FICO uses to calculate their scores comes from the three major credit reporting agencies (Experian, Equifax, and TransUnion). FICO uses this raw data to create a single, three-digit score for each credit bureau. This means that there are three versions of the General Purpose FICO score to start.
FICO also has several other credit score formulas customized for the specific types of loans, such as auto loans, mortgages, and credit cards. Each of these is then re-branded and specially customized for each credit bureau. Finally, each formula may have multiple releases and updates, which are used at the lender’s discretion. And this is how we have 49 FICO scores.
This issue is currently being reviewed by the Consumer Financial Protection Bureau (CFPB), because each year consumers pay millions of dollars for credit scores from various websites but get a generic FICO or other credit scores which may be seemingly useless because the scores may vary by over 100 points.
So the next time you check your credit score, take the time to find out exactly what type of credit score it is, and whether or not it of any value.
Apply for auto or homeowner’s insurance and chances are you’ll find an inquiry on your credit report from the insurance company. Why and how do insurance companies use your credit information? Lamont Boyd, FICO’s director of global scoring solutions for the insurance market, joined me for an interview on Talk Credit Radio to explain how credit information — specifically in FICO’s case, the “credit-based insurance scores” they power — are used by insurers. Following are five “myths” he dispels about how your credit affects the insurance you get.
Myth #1: Your agent will look at your credit report.
In years past, insurance companies may have looked at your credit reports, says Boyd. But “about 18 years ago when FICO created the first credit-based insurance scores, insurance companies from that point forward just began to use credit-based insurance scores. It’s very, very rare that an insurance company is actually looking at anybody’s credit report itself.”
Myth #2: Your scores are the same for insurance and credit purposes.
While similar types of information go into credit scores and credit-based insurance scores, there are some differences. Boyd explains:
“When (FICO) developed our credit risks scores, we’re trying to find from credit information whether or not the way this person has met their credit responsibilities in the past will more likely lead to default or serious delinquency than somebody else. But that’s not what we’re looking for with credit-based insurance scores. So, the models are really focused on the types of information that come from a credit report that are more indicative of future losses. Is this person — from the way they’ve managed their credit in the past — more or less likely to have an automobile or homeowner’s insurance loss?”
That said, however, Boyd says the same types of factors that impact your credit scores can hurt these scores as well; namely, paying bills late, maxing out credit cards or credit lines, or having a short credit history.
“Statistically what we’ve found over many years as a result of independent studies is that people who choose to manage their credit responsibilities very effectively also happen to be the same group of people who manage their risk responsibilities well,” he maintains.
Myth #3: Your claims history affects your credit-based insurance scores.
While an insurance company will look at your previous claims history, FICO doesn’t include that kind of information when calculating these scores. “Our models are specifically based on credit-based insurance information, more specifically, how does this person manage their credit responsibilities?” says Boyd.
Myth #4: Bad credit will get you turned down for insurance.
“In no state in the nation is an insurance company allowed to use credit information as a sole purpose for denying anybody insurance,” Boyd insists. “The use of credit really is to properly segment those risks so they can give them the greatest discount that might be available.”
Myth #5: If you’ve taken a hit financially in the past few years, you’re out of luck.
In addition to the fact that you can’t be turned down for insurance solely because of poor credit, you may also be protected in another way. According to Boyd, the majority of states have implemented provisions of the NCOIL model law (NCOIL stands for National Conference of Insurance Legislators). Under those provisions, somebody who has gone through certain “extraordinary life circumstances” such as a catastrophic event (think hurricanes, tornadoes or flooding); divorce; death of a parent, spouse or child; temporary loss of employment (involuntarily) for three months or more; or identity theft, among others, “has the opportunity to go to their insurance company and offer that information so that the insurance company then can exclude their consideration of credit from their overall underwriting and pricing of that risk.” He says, “That can benefit the consumer who has been negatively impacted by that extraordinary life circumstance.”
Finally, credit-based insurance scores are most heavily weighted toward more recent credit information, says Boyd. So pay down debt, if you can, be sure to make all your payments on time going forward and avoid applying for new credit unless you really need it. “By focusing on those three things, your credit-based insurance score should in fact increase over a period of time,” he says.