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Credit-Scoring-Models

Why Do the Credit Scores I Pull Look Different Than the Ones My Lender Pulls?

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Why Do the Credit Scores I Pull Look Different Than the Ones My Lender Pulls?

“Help! I’m really confused! I got all 3 of my credit scores online last week and they looked really good. Today I applied for a mortgage and the scores the lender pulled look totally different. All 3 scores are about 50 points lower than the scores I saw online. Thankfully, my scores were still high enough to get a mortgage loan, but why are the scores so much lower today?”

In the credit world there are few things which frustrate and upset consumers more than discovering the sometimes vast difference between consumer credit scores and the credit scores used by lenders. Popular TV commercials for credit monitoring websites often confuse consumers and lead them to believe that they have only one credit score. However, the truth is that there are actually hundreds of different types of credit scores. The idea that you have one "official" credit scores is a complete myth.

Consumer Scores Vs. Lender Scores

While there are hundreds of credit scores available, most of these scores can be boiled down into one of 2 categories - consumer scores or lender scores. (Insurance companies often use credit based insurance risk scores as well, but for the purpose of this article those scores will fall into the "lender" category as well.) Consumer scores are scores that are accessible to you individually. You can purchase these scores from the credit bureaus directly, from FICO directly, or from a host of consumer credit monitoring websites. Some websites will offer you free credit scores in exchange for signing up for a trial offer of their credit monitoring services. Other websites will offer you a free score from 1 of the 3 major credit bureaus (not all 3) in exchange for your email address and the right to advertise financial services to you. CLICK HERE if you would like to compare websites where you can access your 3 consumer credit scores.

Lender scores are almost always some version of a FICO score. There are some lenders which have begun using VantageScore credit scores (a score created by the credit bureaus themselves) in recent years, but FICO is still the most popular lender score in use today by a landslide. Both FICO and VantageScore have released multiple generations of their credit scoring software. Additionally, FICO scores come in many varieties (FICO Mortgage Score, FICO Auto Score, FICO Personal Finance Score, FICO Installment Loan Score, etc.) and each different FICO score variety typically has different versions in use as well. If today you were to pull a copy of your consumer credit scores, have a mortgage loan officer pull your credit scores, and have an auto lender pull your credit score then you have almost a 100% chance of getting a different set of numbers every time. Credit scores can vary pretty wildly depending upon which credit scoring model is being used to calculate them.

Focus On Healthy Credit

If you are feeling frustrated or overwhelmed as you try to keep track with all of the different possible credit scores, you are not alone. Remember the statement above revealing that you have hundreds of credit scores? It would be practically impossible for a consumer to keep track of each one of these scores individually. Instead of spending time and energy focusing on the numbers, it is much better to focus on the health of your credit as a whole.

The fact of the matter is that all credit scores are based upon the same data. Your credit scores are calculated from the information which is contained in your credit reports. (Don't forget, you can get a copy of all 3 of your credit reports, without scores, completely free once a year at www.annualcreditreport.com.) If your credit reports show that you routinely make late payments on your accounts, your scores will suffer regardless of who pulls them or which credit scoring model is used to calculate them. If you have clean credit reports with no collections, no late payments, and low credit card balances then all of your many scores will likely be in great shape. You may have hundreds of scores, but you only have 3 credit reports. You may not be able to control your credit scores, but you can absolutely control your credit management habits.  

michelle-black-credit-expert

Michelle Black is an author and a credit expert with nearly 2 decades of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars on various credit and financial topics. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft.

Expert Credit Advice:

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The Newest Credit Scoring Model: VantageScore 4.0

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The Newest Credit Scoring Model: VantageScore 4.0

To many people, FICO is king when it comes to credit scoring models. The majority of lenders, most notably those in the mortgage industry, rely either exclusively or at least heavily upon FICO scores as they evaluate the credit worthiness of new applicants for financing. However, with the introduction of VantageScore 4.0 in the fall of 2017 many lenders are starting to pay a bit more attention to this newest arrival to the world of credit scoring.

In truth, VantageScore Solutions (the company which creates and sells VantageScore credit scores) is not so new. It is only new when compared with the Fair Isaac Corporation (FICO). VantageScore Solutions, founded by the 3 major credit reporting agencies themselves in 2006, is actually over a decade old. 

Yet most lenders still prefer FICO scores. FICO was initially founded in 1956 and created its first credit scoring system in 1958. The credit bureaus themselves began to adopt FICO credit bureau risk scores between 1981 (Equifax) and 1991. According to FICO its scores are currently used by 95% of the largest financial institutions in the country.

VantageScore 4.0

Though the company is already dominate in direct-to-consumer credit score sales, VantageScore Solutions has been fighting for over a decade to dip further and further into FICO's lender-purchased credit score market share. This goal is achieved by convincing more and more lenders to purchase VantageScore's credit scores to use for risk analysis in prospecting, account management, and application reviews. The roll out of the 4th generation of its scoring model in the fall of 2017 will be just one more step toward this goal, but might be better described as a giant leap instead of a step.

The reason the release of VantageScore 4.0 is such big news is because it will be the first credit scoring model to consider trended data in the calculation of consumer credit scores.  Trended data, added to credit reports several years ago, allows credit card issuers to report a 24 month history of historical balances and payment amounts made by their customers. This historical data can show future lenders whether you are truly someone who pays off your credit card balances in full each month (aka a transactor) or whether you are in the habit of revolving an outstanding balance from one month to the next (aka a revolver).

Revolvers, especially minimum payers (consumers who only pay the minimum payment due on their credit card bills) represent a higher level of risk to lenders. In fact, according to a study conducted by Experian, minimum payers are 6 times more likely to have a future delinquency than transactors. TransUnion's study on trended data found that revolvers represent between 3 to 5 times more risk than transactors.

Including trended data in VantageScore 4.0 gives this new scoring model increased predictive power over previous generations of VantageScore and, arguably, FICO scoring models as well. In other words, this new scoring model is being touted as a more reliable way to predict credit risk. Predicting risk, after all, is why lenders purchase credit scores in the first place.

Advice for Consumers

Because of recent changes in credit reporting, especially the upcoming removal of many tax liens and judgments from credit reports and the removal of many medical collections as well, lenders and credit score developers are going to begin paying more attention to alternative credit data which is also predictive. It has always been important to pay off your credit card balances in full each month both from a credit scoring perspective and also from a financial perspective as well. However, with the consideration of trended data now in the works the importance of paying off your credit card balances has multiplied exponentially.

Of course implementing a new credit scoring model is very expensive for lenders. Due to the high cost it will likely be years before a majority of lenders begin using VantageScore 4.0. The same can be assumed for any yet unannounced but potentially forthcoming new releases from FICO which consider trended data for that matter.

As a result consumers do not necessarily have to worry about trended data impacting their credit scores for a while. Still, remember that when credit scoring models which consider trended data are finally adopted by lenders those models will be looking back at a 24 month history of your credit card payments. This means that the time to develop the habit of paying off your credit card balances monthly is now.

 

michelle-black-credit-expert

Michelle Black is an author and leading credit expert with over a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.

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Why You Shouldn't Be Too Excited about the New FICO 9 Scoring System...Yet

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Why You Shouldn't Be Too Excited about the New FICO 9 Scoring System...Yet

Last week, on August 7th to be precise, a highly anticipated announcement was made regarding the upcoming release of the new FICO 9 credit scoring system. FICO Score 9 will become commercially available in the fall of 2014 and will feature some pretty radical and exciting changes in the way that the scoring system calculates consumers' credit scores. The new scoring system features 12 scoring models which will be installed on the mainframes of the 3 major credit reporting agencies - Equifax, Trans Union, and Experian.

The Good News

In Fair Isaac Corporation's press release regarding FICO Score 9 it was revealed that there will be 2 major changes in the way the new credit score system treats certain types of collection accounts. First, paid collections will be ignored and bypassed. The bypassing of paid collections is a departure from previous versions of FICO scoring models which are currently in use by lenders today.

Under previous versions of FICO, paying or settling a collection account usually has no positive impact upon a consumer's credit scores whatsoever. The design objective of FICO scores, in other words what FICO scores are created to do,  is to predict the likelihood that a consumer will become 90 days past due on any account within the next 24 months. The reason that paying collections typically does nothing to help a consumer's FICO scores is due to the fact that current versions of FICO are built to be concerned with the fact that a collection account occurred in the first place. Whether a collection account has a $0 balance or a balance greater than $0, the negative score impact is likely the same. Bypassing paid collection accounts by FICO Score 9 will be a major change could cause credit score increases for many consumers.

The second major change being introduced with FICO Score 9 is how the scoring system treats medical collection accounts. Under previous versions of FICO, medical collections were just as damaging to a consumer's credit scores as non-medical collections. However, according to Fair Isaac Corporation, FICO Score  9 "...will help ensure that medical collections have a lower impact on the score." In fact, consumers whose only derogatory accounts are medical collections could expect to see a credit score increase of around 25 points.

Why You Shouldn't Be Too Excited Yet

FICO Score 9, scheduled to become commercially available in the fall of 2014, promises some changes which consumers and loan officers are excited to see. Unfortunately, the new scoring model will likely not be adopted by lenders for a very long time.

It is timely and expensive for lenders to upgrade to a new credit scoring model. Lenders do not change credit scoring models because a new one becomes commercially available either. It's not like lenders will line up around the block to purchase the new FICO Score 9 as if it were the hottest new smart phone release from Apple. Instead, lenders make a change because their own extensive research proves that the newer scoring model is more effective at accurately predicting risk than the previous version they have been using. Even then the change is likely to be slow because, after all, their current scoring model isn't broken, it just is less effective.

The previous version of FICO to be released, FICO 8, is only now being used by a majority of lenders. FICO 8 was released in 2009. In the mortgage industry where the credit scoring version choice is controlled by Fannie Mae and Freddie Mac, the version released prior to FICO 8 is still in use. It will likely be a very, very long time before the new FICO 9 Score is ever seen on a Residential Mortgage Credit Report (RMCR).

Additionally, there is no guarantee that the new FICO 9 Score will be adopted by lenders at all. Yes, FICO has been the undisputed leader in the credit scoring market for decades and they likely will remain the leader in the future. However, FICO is not without competition. VantageScore is the credit scoring product offered by the credit reporting agencies - Equifax, Trans Union, and Experian. While the vast majority of lenders continue to use FICO credit scoring models to calculate risk, VantageScore has been gaining ground little by little since its unveiling in 2006. 

michelle-black-credit-expert

Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here. 

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Credit Report vs. Credit Score - What's the Difference?

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Credit Report vs. Credit Score - What's the Difference?

Credit Reports versus Credit Scores

Let’s face it, for most people the world of credit can be a very confusing place. If you can’t explain the difference between a credit report and a credit score, you are not alone. People often use the terms “credit reports” and “credit scores” as if they were interchangeable. However, credit reports and credit scores are two totally different animals. Here is a crash course in credit terminology to help you make sense of this confusing topic and turn you into the super savvy consumer you always wanted to be.

Credit Reports

There is not merely one, but rather three major credit bureaus who compile data from lenders, credit card companies, collection agencies, public records, etc.  The credit bureaus are Equifax, Trans Union, and Experian. The data is compiled into credit files which are then used to generate credit reports (basically user friendly versions of the credit files themselves). In fact, the credit bureaus compile credit data about millions of consumers and sell credit reports to lenders and directly to consumers themselves.

If you have not checked your credit reports in a while, it is a good idea to do so right away. After all, it is ultimately your responsibility to monitor your credit reports for errors and for fraud. You can access a free copy of each of your credit reports (NOT your credit scores) each year at www.annualcreditreport.com. Credit reports do not exist to judge your credit management history, but rather to simply lay out the facts regarding how well you manage your debts.

Credit Scores

Contrary to popular belief, the credit bureaus themselves do not calculate your credit scores. Where a credit report simply lists a record of your credit management history, a credit score actually exists to evaluate and rate that data into an easy to understand number for lenders. A low number indicates that the consumer has a history of poor credit management. A high number indicates the opposite.

The original and most popular credit scoring model by a huge margin is FICO. In 1989 FICO partnered with Equifax to introduce the first credit bureau FICO risk score. The purpose of a FICO credit score is to predict risk – specifically the risk of the consumer going 90 days late on any account within the next 24 months. Today, FICO builds credit scoring software and installs it on the mainframe of each of the 3 major credit bureaus. The credit bureaus will use FICO’s software to calculate their own credit data and then sells the credit reports with credit scores to lenders. FICO receives a royalty from the credit bureaus for the use of the software.

FICO credit scores range from 300 to 850. If a consumer has a low credit score then the data in the consumer’s credit report indicates that there is a high risk involved with loaning money to that consumer. If a consumer has a high credit score then there is a low risk involved with loaning money to that consumer.

As mentioned above, consumers are currently not entitled via federal law to receive free copies of their credit scores annually. (Note: if you apply for a mortgage then mortgage lenders are required by law to show you all 3 of your credit scores that were pulled for the mortgage application.) Still, there are several places online where you can receive free educational credit scores (not the same scores as the ones used by lenders) or a free score from one of the bureaus individually. You can also view your credit scores, often initially for free, as a benefit of signing up for monthly credit monitoring services. Beware, many monitoring services will only all you to see your credit score from one and not all three of the credit bureaus. CLICK HERE to access a great comparison site where you can check out the benefits of several different credit monitoring services before deciding which option is right for you.

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Michelle Black is an 12+ year credit expert with HOPE4USA, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here. 

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