As risk assessment technology has evolved, terms such as "credit score" have developed multiple meanings, thus causing some confusion. A consumer seeking credit may be subject to various forms of credit scoring models, such as custom scoring models and mortgage scoring models, as well as automated underwriting systems. It is important for consumers to understand that they have not been simply assigned one, universal "credit score" based on information contained in their credit report.
Often, the terms "credit score" and "FICO score" are used generically to mean a score that is obtained from one of the three national consumer reporting agencies ("CRAs"). These are also often referred to as "bureau scores."(6) Each of the three national CRAs has its own credit scoring model: Trans Union's scoring model is known as Empirica; Experian's as FICO; and Equifax's as Beacon. All three models were developed by Fair, Isaac and Company(7) and are based solely on the information contained in the CRAs' credit reports. Because the credit data reported to each may differ and each model is unique, the same consumer likely will have a different score from each of the three CRAs at any given time.
While credit scores obtained from consumer reporting agencies are based solely on credit report information, other credit scores are available that are based upon additional or different information. For example, some creditors have developed custom scoring models, either themselves or using modeling experts like Fair, Isaac. These scoring models may be developed based on the lending experience of a specific creditor and are designed to be used by that creditor to make its credit decisions. There are also scores specifically designed to predict the risk of delinquency for a particular type of credit, such as a credit card, automobile loan, or home equity loan.(8) In addition, some scoring models may incorporate, in addition to the contents of the credit report, information from the consumer's application and information about the terms of the particular loan.(9) The term "mortgage score" is often used by mortgage lenders to refer to such scores.
Because of the variety of scoring models available, both generic and custom, individual creditors do not necessarily rely upon the same credit score to make their individual credit decisions. Moreover, a single creditor may use a different scoring model for each of its loan products or may consider more than one score in making a single lending decision. It is also important to note that credit scores may be used not only to determine whether a consumer qualifies for a particular product, but also to assess what price a consumer will pay for the loan - a practice commonly known as risk-based pricing.
In addition to credit scoring models, automated underwriting systems are also often used in mortgage lending.(10) Automated underwriting systems may use credit scores or mortgage scores, but do not themselves generate a specific number. Rather, they provide a qualitative recommendation to the user concerning the consumer's application. For example, Fannie Mae's system recommends that the lender "Accept," "Refer," or "Refer with Caution."(11) Many mortgage lenders that intend to sell their loans on the secondary market will likely use Fannie Mae's or Freddie Mac's automated underwriting system.
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As risk assessment technology has evolved, terms such as "credit score" have developed multiple meanings, thus causing some confusion. A consumer seeking credit may be subject to various forms of credit scoring models, such as custom scoring models and mortgage scoring models, as well as automated underwriting systems. It is important for consumers to understand that they have not been simply assigned one, universal "credit score" based on information contained in their credit report.
Often, the terms "credit score" and "FICO score" are used generically to mean a score that is obtained from one of the three national consumer reporting agencies ("CRAs"). These are also often referred to as "bureau scores."(6) Each of the three national CRAs has its own credit scoring model: Trans Union's scoring model is known as Empirica; Experian's as FICO; and Equifax's as Beacon. All three models were developed by Fair, Isaac and Company(7) and are based solely on the information contained in the CRAs' credit reports. Because the credit data reported to each may differ and each model is unique, the same consumer likely will have a different score from each of the three CRAs at any given time.
While credit scores obtained from consumer reporting agencies are based solely on credit report information, other credit scores are available that are based upon additional or different information. For example, some creditors have developed custom scoring models, either themselves or using modeling experts like Fair, Isaac. These scoring models may be developed based on the lending experience of a specific creditor and are designed to be used by that creditor to make its credit decisions. There are also scores specifically designed to predict the risk of delinquency for a particular type of credit, such as a credit card, automobile loan, or home equity loan.(8) In addition, some scoring models may incorporate, in addition to the contents of the credit report, information from the consumer's application and information about the terms of the particular loan.(9) The term "mortgage score" is often used by mortgage lenders to refer to such scores.
Because of the variety of scoring models available, both generic and custom, individual creditors do not necessarily rely upon the same credit score to make their individual credit decisions. Moreover, a single creditor may use a different scoring model for each of its loan products or may consider more than one score in making a single lending decision. It is also important to note that credit scores may be used not only to determine whether a consumer qualifies for a particular product, but also to assess what price a consumer will pay for the loan - a practice commonly known as risk-based pricing.
In addition to credit scoring models, automated underwriting systems are also often used in mortgage lending.(10) Automated underwriting systems may use credit scores or mortgage scores, but do not themselves generate a specific number. Rather, they provide a qualitative recommendation to the user concerning the consumer's application. For example, Fannie Mae's system recommends that the lender "Accept," "Refer," or "Refer with Caution."(11) Many mortgage lenders that intend to sell their loans on the secondary market will likely use Fannie Mae's or Freddie Mac's automated underwriting system.