Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Dec 16, 2013

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Credit scores are sort of like souls. After too many mistakes, a person with a bad credit score finds themselves damned to a financial inferno where they can’t qualify for loans.

Making the right decisions and repaying lenders means a person gets a glowing credit score and easy access to financing heaven.

Well it turns out there’s actually more than one soul, so to speak, or more accurately, more than one type of credit score.

While this is news to many people, whole bureaus and financial establishments exist to monitor and calculate credit scores. Even though not all of these credit scores are widely known, consumers and potential personal loan borrowers should understand how these can impact their ability to borrow money.

FICO Credit Score Dominance

One credit reporting company that stands over all the others is FICO, more formally known as the Fair Isaac Corporation.

Beverly Harzog, author of Confessions of a Credit Junkie, said that even though there are many different credit scores, about 90 percent of lenders use a version of the FICO score in their decision making.

“For instance, there’s a FICO mortgage credit score,” she said. “This is often used by lenders when you apply for a mortgage. If you apply for a credit card, your lender might request a FICO score that reflects risk related to credit cards.”

According to Anthony Sprauve, Senior Consumer Credit Specialist at FICO, not only is the FICO Score used in 90 percent of all lending decisions but that over 10 billion FICO Scores are used worldwide every year in credit decisions.

FICO scores are calculated based on the following broad segments:

  • 35 percent – Payment history
  • 30 percent – Amounts owed
  • 15 percent – Length of credit history
  • 10 percent – New credit
  • 10 percent – Types of credit used

“Your FICO Score is calculated based on these five categories,” said Sprauve. “For some groups, the importance of these categories may vary. For example, people who have not been using credit long will be factored differently than those with a longer credit history.”

While FICO may dominate in quantity, it faces stiff competition from several large rivals that tout other types of credit scores.

Three Bureaus, Many Credit Scores

The three main credit bureaus that calculate credit scores and rival FICO are Experian, Equifax, and TransUnion. Each of these bureaus maintains their own secretive models for calculating credit scores.

Lauralynn Schueckler, Online Marketing Specialist at Advantage Credit Counseling Service, said that the three major credit bureaus use a credit score called the VantageScore in order to compete with FICO.

“VantageScore uses almost the same calculation weights and factors that FICO uses, but the main difference is that consumers are allowed to see their VantageScore score, but they are not allowed to see their FICO,” said Schueckler. “The three credit bureaus have said that the VantageScore is something that will help subprime lenders, as well as traditional banks and lending institutions.”

Aside from the VantageScore, other credit scores exist, such as the CE Score, which is used by free credit reporting sites but is rarely used by actual lenders. Instead, the CE Score is intended for consumers to gain an overview of their personal credit scores.

There is also the Plus Score from Experian, but once again, it is mainly used for consumer education. However, these are just two of many variant and specialized credit scores.

“There are many different credit scoring systems or models out there that consumers and lenders can use, such as FICO, VantageScore, CE Score, Equifax Credit Score, Application Score, Credit Optics Score, TransRisk, and National Equivalency Score,” said Schueckler.

She continued to explain that just as many of these credit scores are calculated in the same fashion as the FICO score, they also have many of the same major factors and categories. However, they have varying levels of importance for each category, resulting in a slightly different score across the board.

One problem with these credit scoring systems is that many of them are reliant on pulling data from the three major credit bureaus.

“You could have an error on your Experian credit report and not have that same error show up on your Equifax or TransUnion reports, and this will give different information and thus create slightly different scores,” said Schueckler. “That is why things are based on ranges of numbers and not actual hard numbers, like 654 or 487, but rather 550-650 (fair) or 400-500 (poor) and so on. This is the reason a consumer could have multiple credit scores out there or why Lender #1 might say you have a better credit score than what Lender #2 tells you.”

While most of the different credit scores take that broad look at a consumer’s creditworthiness, some specialized credit scores can actually deal with matters of life or death.

Healthy and Unhealthy Medical Credit Scores

Joel Winston, General Counsel for Annual Medical Report, said that even the medical industry has non-traditional credit scores, such as medical or pharmacy history scores, medication adherence scores, and medical payment scores. While these are not traditional types of credit scores, they are still categorized as credit scores under the terms of the Fair Credit Reporting Act and various state laws.

Some of the medical credit score bureaus, like Ingenix and Milliman, create profiles of consumers by viewing their prescription drug histories. This practice helps insurers process drug claims and also evaluate which consumers have higher medical costs.

For example, some people with preexisting conditions or who are taking prescription drugs may have higher scores which implies a higher medical cost.

Just as smaller credit score bureaus that are specialized in medical data create medical credit scores, some of the larger bureaus have entered the market as well.

Equifax’s Health-Credit Score predicts if a patient is able to repay their medical bills or not. This credit score draws its data from a consumer’s normal credit report and matches it to hospital payment records in order to look for common patterns. By using this data to identify the variables most associated with a patient’s ability to repay a medical bill, insurers and healthcare providers can see who is likely to repay and who may require additional collection resources. 

As powerful as these credit scores and the bureaus that craft them can be, Winston is skeptical of their infallibility.

“Time and time again, research has shown these major credit reports to be inaccurate, incomplete, and discriminatory,” he said. “A 2013 Federal Trade Commission study of the U.S. credit reporting industry found that 26 percent of bureaus identified at least one potentially material error on at least one of their three major credit reports. In addition, 25 percent of consumers identified errors on their credit reports that might affect their credit scores.”

Unfortunately, even if consumers find errors, they need to spend time and energy finding out how to rectify the problem. While this varies from case to case, there is a silver lining since fixed errors lead to a modified and improved credit score. Another problem facing consumers is that these medical credit scores are being used in increasing numbers.

“Hospitals, doctors, dentists, and other medical care professionals are implementing these medical credit score screening procedures against new patients,” said Winston. “A ‘high risk’ score resulting in a denial could force a patient to postpone medical care or pay additional out-of-pocket costs.”

As a result, consumers should pay attention to their medical credit report files, especially if they do not have the cash reserves to pay for an unexpected medical cost.

Surprisingly, Winston predicts that under the Affordable Care Act, the use of medical credit scores will increase. This is because the newly-insured cannot use medical benefits available to them without paying for deductibles, copayments, and coinsurance. As more of the newly-insured get treatment, payment default rates are expected to skyrocket. In response, many medical professionals and businesses are developing more stringent credit standards, such as those used by banks, mortgage lenders, and credit card providers.

“To put it plainly, hospitals will get more government money if their patients recover faster and stay healthier,” said Winston.

Actions for Consumers

Even though these multiple personal credit scores and medical credit scores can be worrying to many people, consumers still have a number of options and courses of action to protect themselves.

In Harzog’s experience, wasting time worrying about which credit score a lender will use on a consumer is pointless. Lenders usually don’t reveal which credit bureau will be contacted when a consumer is applying for a personal loan or line-of-credit.

Instead, borrowers and applicants should focus on getting good credit scores by paying their bills on time and keeping their balances low.

But when obtaining a credit report, consumers should be distrustful of many credit-score-generating websites, according to Eran Sinai, Director of the Royal Law Group.

“Most of them are third parties owned by the credit bureaus themselves with one target in mind and that is revenue generation,” he said. “So the scores are not accurate. Sometimes the scores are higher than the real FICO score.”

Sinai recommends that consumers heal their credit scores by paying down their credit cards and other revolving debt. They should also avoid excessive credit inquiries and avoid department store credit card offers.

Assuming a consumer finds that her or she has massively divergent credit scores, they should obtain a copy from each credit bureau in order to review and compare them. Any errors in reporting will become more apparent when compared across the board. Sinai urges this practice since financial identity theft is so common and many people don’t know their identity is stolen until they apply for credit.

In fact, identity theft and other credit errors can prove very damaging to a person’s life. It can even lead to legal proceedings. Consumers with low credit scores tend to get involved in legal proceedings because low scores can translate into collections, judgments, foreclosures, repossessions, and bankruptcies.

John C. Heath, an attorney at Lexington Law, said that in his practice, he found that clients who have low credit scores generally look for assistance in removing questionable items from their credit reports.

“When items are misreported, incomplete, or obsolete, and the credit score is negatively affected, credit offers tend to dry up or become non-existent, leaving the client little room for needed financing, job improvement, transportation, or a home,” said Heath. “This can lead to little opportunity for the client to pull themselves out of their current financial situation.”

Even though it is fairly common sense that making payments on time is a great way to avoid a bad credit score, that doesn’t necessarily mean that a consumer should be worry free.

Kal Kerlin, Loan Officer for Inlanta Mortgage, said that making payments on time won’t necessarily give consumers good to great credit scores and for a number of reasons. one of which is due to the relationship between lines of credit and percentages.

“The rule of thumb that seems to apply is that you want your balances to be below 30 percent of your line of credit,” said Kerlin. “The more above 30 percent you are on each card, the more of a negative effect this will have on your credit score.”

This means that a borrower can be making their credit card payments on time, but if they are nearly maxed out on their credit cards then they will still have a low credit score as a result.

“Credit scores are a snapshot in time,” said Kerlin. “So, if today your balances are high in relationship to your lines of credit, if you pay them down, next month you could have a nice bump in your score.”

Fortunately, credit scores, like wounds, heal with time. The more time that passes between mistakes and missed payments, the less of an impact they have on a borrower.

Consumers should be assured that even though there are many kinds of credit scores, they have a measure of power in staying at a healthy credit level. While most people don’t have bad credit scores, that doesn’t mean that people with healthy credit should be carefree. Anyone who doesn’t keep an eye on their credit score is likely to be in for a surprise the next time they need to borrow money.