You have more than one credit score.
What’s more, the credit scores provided by many credit monitoring services are often different than the ones you’ll receive from a mortgage company.
These scores are often derived from a different source or product and are often not “Fico” scores.
Personal Excerpt – “I routinely see these scores vary by as much as 40 points and personally experienced it when I purchased scores from Transunion (through freecreditreport.com) and then ran my own credit scores in conjunction with a mortgage application. Sure enough, a 40 point reduction. Can that effect the interest rate I would get and/or the ability to qualify? Absolutely. In the mortgage industry for example, the difference between, a 680 and a 720 credit score can be .25% or more in rate and even a deal breaker sometimes whether a persona can actually get the loan they want.”
Now, a new study from the Consumer Financial Protection Bureau is letting consumers in on the big secret.
The credit bureau’s themselves and the Fair Isaac Corporation (Fico) have every interest in letting people believe their score is the “one and only score.” It’s good for business and their fee based revenue model.
Many consumers have bought into this mentality by purchasing their score regularly, at $15 a month, believing there is only one credit score and this would be the same score the mortgage lender or bank would see. Consumers purchase this “score” only to later apply for a mortgage and notice their score dropped by 40 points. They think they are golden with this 720 score they pulled, only to later see it come back at 687 on a real live mortgage credit report, which could mean .250% higher in rate, or worse, not being able to qualify at all. Consumers are left dissatisfied to learn otherwise and feel frustrated that they were not able to get the mortgage rate they had wanted.
Why is this happening? Well, for starters the industry does not make it very clear or transparent to consumers on how these different credit scoring sites actually work. Consumers are unaware that lenders use credit scores that are produced by a variety of scoring models. The pricey FICO score we all think is critical to locking in a great rate is really just one of 49 potential scores a lender uses — and that’s if they actually use FICO scores.
So what do we do with this new information? Are credit scores useless? Not at all, but our attitudes toward them should change.
How to react
These more-than-one-credit-score findings may lead some to believe that consumer credit scores hold no weight, but there are some other important things to consider:
- Be wary of purchasing your credit score from these fee based monitoring services. Any credit score should be used as a guide as there is no way to guarantee that the score you buy is the score that the bank uses. Even if you purchase a FICO score and apply with a creditor that uses FICO scores, the score you purchased may not be the one that creditor uses.
- Focus on the relative grade of your scores. In light of this high correlation, it’s important to focus less on the three-digit number (since it will vary) and more on the relative credit grade of that score. The study found that if a consumer had a good score from one scoring model the consumer likely had a good score on another model.
- Knowing your score is only half the battle. A number can’t tell you much of anything, except that creditors consider you a good or bad credit risk. But the factors that make up your credit score — like your percentage of on-time payments — do tell you how and where you need to change your financial behavior.
- Your credit reports do matter. Consumer credit reports contain the information that make up credit scores. You’re entitled to one free report from each of the three credit bureaus every year from AnnualCreditReport.com. However, just know, that the score you pay for or get in conjunction with this free annual credit report is likely to be substantially different (and usually higher) than the actual one that counts when applying for a mortgage.
- Credit scores aren’t stagnant. Something else that’s important to remember is that your credit score this month (no matter which one you check) is not necessarily the same as your credit score next month. That’s because credit scores are made up of various factors that can change from month to month.
- Last, but not least (and possibly most important) – If buying a home or refinancing is your goal, get Pre-Approved from a trusted Mortgage Broker or Lender. Having them run your credit scores will get you 3 scores and the middle one is used to determine the rate and ability to qualify. There is only one way to see what you are working with here and that’s to simply apply and have them run your credit.
We hope this helps you make sense of your credit scoring options. If you still have a few questions, contact us to learn more about our complimentary credit review and analysis service.