Find out How Credit Scoring is Different Than Credit Modeling

What’s The Difference Between Credit Scores, Application Scores and Custom Models?

Scores, scores, scores…too many scores. One of the most common questions I hear is “what is an application score?” and “how is that different from my credit score?”
In order to really understand the whole scoring landscape you really need to expand that question to include custom scoring models and insurance scoring models.

Here’s a definition of 4 of the most common types of “scores” used today by lenders and insurance companies.
Credit Bureau Scoring Models
– These scoring models use only the information on your credit reports to generate a “credit bureau risk score.” These scores are used by pretty much all lenders when you apply for credit. They are designed to predict whether or not you will pay your bills on time. They are the least powerful of the scores we’ll define. However, they are also readily available for any lender to use and are the least expensive. As such, they are by far the most popular and commonly used scores.

Application Scoring Models – These scoring models use information from BOTH your credit reports AND your credit application. Again, these scores are designed to predict whether you will pay your bills on time. They are more powerful than credit bureau scoring models but are also more expensive and more difficult to implement. They are more powerful because they take into account information from your application, which credit scoring models can’t do. There is a lot of predictive information that can be pulled from an application…your salary, time on the job, household income and time at your residence just to name a few. These are not as common as credit bureau scoring models.
Custom Models – These are the Rolls Royce of the bunch. They are by far the most powerful models but are also very expensive because they have to be custom built for each lender that uses them. To buy a custom model and maintain it can cost well into the 7 figures. They are only used by the powerhouse lenders who can afford them. They are so much better than all other types of models that lenders who use them can do a much better job of separating the future “good” payers from the future “bad” payers. So much better that they justify their cost.

Insurance Credit Scores
– These scores aren’t used by lenders…they are used by insurance companies. They are designed to predict a couple of things (depending on whose insurance score you use). Some are designed to predict whether or not you will file a homeowners or auto claim. And others are designed to predict whether or not your premiums are likely to outpace your claims. Yep, you got it. These are predicting whether or not you will be a profitable insurance customer.

These scores use information from your credit reports and also previous insurance claim data.
So let’s summarize…

Least expensive, least powerful, most common – Credit Bureau Scoring Models
More expensive, more powerful, less common – Application Scoring Models
Most expensive, most powerful, least common – Custom Scoring Models
Unique to the Insurance Industry – Insurance Credit Scores

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