How do credit scores work, and why do they vary between different reporting agencies?
In: Economics
A credit score, in the simplest sense, is supposed to be a measurement of the risk of loaning you money. There’s always a chance someone doesn’t pay back a loan.
Just like if you loan two friends $20 each. The one who is reliable, has money, and always pays you back on time is a great person to loan money to. The guy who takes the cash, makes excuses, and says “ah yeah I don’t have it this week” and never pays you back or says they can only pay half of it isn’t a great person to loan to.
Roughly, a credit score tries to find out who is who in that situation.
Different agencies have slightly different calculation methods, and may get slightly different data to make their calculations on, but its not important they are all about the same
Credit score is a measure of how responsibly you’ve managed credit in the past. The precise formula for calculating it is a secret, but the factors that go into it aren’t. It looks at how long they’ve been tracking your history, how many payments have been missed and by how long, how many different types of account they have data for, how much balance you’re carrying on revolving credit, etc. It does not look at income, net worth, or employment history (though a credit application will).
Every month a credit issuer can choose to report activity to some, all, or none of the credit bureaus. Different lenders choose to share data with different bureaus, so the bureaus may have different scores for a person, sometimes quite significantly.
ELI5 why are they considered so fundamental in the US yet aren’t used at all in so many other places (or rather – banks and others can rate my ability to repay debt without checking a history)?
Here my “credit score” is basically a formula based on my income, debt and expenses (living costs, family situation) and of course any past failures to pay bills. But not on past ability to successfully pay my bills or how long I had a credit card.
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