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where-credit-scores-come-from

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.  

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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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Where Do Credit Scores Come From?

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Where Do Credit Scores Come From?

Credit scores can affect your life in many important ways. First, anytime you apply for a mortgage, car loan, credit card, or financing of any kind, your credit score will typically be looked at to determine whether you are approved or denied for your financing application. If you are approved, your credit scores are looked at again to determine the type of interest rate and terms you will be offered. Credit scores are often the #1 factor considered whenever you apply for a loan.

Since credit scores are generally the first key to loan approval, it is important to understand where your credit scores come from and how they are calculated. There are 3 major credit bureaus in the United States: Equifax, TransUnion, and Experian. If a lender were to pull your credit report and score from each of the 3 bureaus, all 3 of those scores would likely be at least a little different.

There is more than one type of credit score available as well. In fact, there are hundreds. Currently, the type of credit score brand which is most commonly used by lenders is the FICO Score (though VantageScore continues to gain ground in the marketplace).

FICO Scores range from 300 - 850 with higher credit scores indicating less credit risk. The following chart shows the basic makeup of how your FICO credit scores are calculated:

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Payment History, which considers factors pertaining to how you have managed your credit obligations both currently and in the past, accounts for 35% of your FICO Scores. This category can also be described as "the presence or absence of derogatory information."

If you have a history of making late payments on your financial obligations, your credit score will almost certainly be on the lower end of the spectrum. It may sound crazy, but some late payments could potentially damage your credit scores more than any other factor on a credit report including bankruptcy, foreclosure, or repossession (especially if the late payment is severe, recent, and if the account is currently past due).

Amounts Owed accounts for 30% of your FICO Scores. The primary factor considered within this category is your revolving utilization ratio. FICO's scoring models will consider the amount of credit card debt (aka balances) on your credit report and will compare it to your available credit limits. This higher your debt to limit ratio climbs on your reports, the worse the impact will be upon your scores.

Here is an example of how revolving utilization is calculated. If you have a credit card with a $500 limit and your credit report shows a $500 balance on the account, your utilization ratio is 100%. At 100% utilization your credit scores are practically guaranteed to be impacted negatively. However, keep that same credit card account paid off and your credit scores will almost certainly receive a boost. High credit card balances can significantly lower your credit scores, even if you pay every single monthly payment on time.

Length of Credit History makes up 15% of your FICO Scores. FICO considers the average age of your credit lines as well as the age of your oldest account to determine how many points will be awarded to your credit score for this category.

The older the accounts appearing on your credit reports, the better. Merely opening a new account can potentially lower your credit scores, even if you have never missed a payment on the account – so proceed with caution when applying for new credit. You do not have to be afraid to open new credit; however, you should probably develop the habit of only opening new credit when really necessary.

New Credit makes up 10% of your FICO Scores. One of the primary factors considered within this category is how often you apply for new accounts.  Every time your credit report is pulled as part of an application for financing a record of the pull, known as a "hard inquiry," is added to your credit report(s).

Hard inquiries have the potential to impact your credit scores negatively. However, a “soft inquiry” of your credit report (such as requesting a copy of your own personal credit report) does not hurt your credit score at all.  If you have not reviewed your credit reports in a while, you are entitled to a free copy of all 3 of your reports every 12 months from www.annualcreditreport.com. Checking your reports at least several times a year for errors is highly recommended.

Types of Credit Used accounts for the final 10% of your FICO Scores. To maximize your scores in this category it is important to have the right mixture of account types on your credit reports. FICO rewards consumers who show that they have experience managing a variety of account types (i.e. mortgage accounts, revolving accounts, installment accounts, student loans, etc.). The more diverse the accounts on your credit reports the better your scores will fare.

Have specific questions about your credit reports? Our caring credit experts are here to help. Please contact us via email or call 704-499-9696. We would love to hear from you!

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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. .

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Scorecards: Why It Might Be Impossible for You to Earn an 850 Credit Score

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Scorecards: Why It Might Be Impossible for You to Earn an 850 Credit Score

Credit scores run the world. Okay, maybe that is an overstatement, but the truth is that your credit scores will have a massive influence over your life. In fact, your credit scores exert nearly as much control over the financial quality of your life as does your income.

If you are wise then you already know that learning what it takes to keep your credit reports and scores in stellar shape is a very important goal - one of the most important wealth building goals you can make for yourself. Yet if you are a natural born overachiever and are shooting for the stars with your credit scores you might find yourself a bit disappointed. Achieving the ever elusive perfect credit score of 850 might actually be downright impossible for you right now thanks to a not-so-well known component of credit scoring models - the scorecard.    

What Is a Credit Scorecard?

Behind the scenes of every credit scoring model there are multiple scorecards at work. Scorecards evaluate the information on your credit reports and turn that information into credit score points which are added up and delivered to a lender in the form of a credit score. The way that scorecards evaluate the information on your credit reports is by asking questions - questions such as "Are there any late payments present?" The answers to these questions are known as "characteristics." If the answer to the previous question about the presence of late payments was "yes" then you would earn less points to be added to your overall credit score than those which you would earn if the answer to the question was "no."

Scorecards are the nuts and bolts of a credit scoring system. They set the rules for how your credit scores are calculated. Without scorecards it would be impossible for a lender to ever get a copy of your credit scores.

How Different Scorecards Impact You

As mentioned above, every major credit scoring model features multiple scorecards. Depending upon the information contained in your credit reports you are assigned a specific scorecard each time your credit scores are calculated. When FICO releases a new credit scoring model, such as the most recently released FICO 9, what most consumers and even financial professionals do not realize is that - thanks to the existence of scorecards inside of the scoring model - all consumers credit reports are not graded according to the exact same scale. Instead, scorecards will separate consumers into like or homogenous groups and those groups will have their credit reports scored differently.

For example, there are separate scorecards for consumers who have filed bankruptcy or those who have delinquencies (late payments) present on their reports. There are scorecards for consumers with thin or young credit files (not many accounts) and files for consumers without delinquencies as well. While FICO and VantageScore do not disclose the actual types or numbers of scorecards working behind the scenes of their credit scoring models, it would not be unusual for there to be 10 or more scorecards in existence for a single credit scoring model.

The most common credit scoring range for consumers, especially for the most popular FICO and VantageScore scoring models, is 300 - 850. Therefore, if you ask were to ask most credit experts what is the highest credit score you could possibly earn you would probably receive "850" as an answer. Not so fast. 850 may be the highest credit score available, but that does not necessarily mean that an 850 is available to you, at least not at immediately. If you have a bankruptcy on your credit reports, for example, then you would find yourself being scored by a bankruptcy scorecard.

Scorecards designed for those with derogatory information do not have the same maximum credit score possibility, 850, as those scorecards without any derogatory information would have. As a result, if you did have a past bankruptcy on your credit reports then achieving an 850 credit score would be impossible for you until the bankruptcy (and any other derogatory information) was removed and your report was able to be scored by a scorecard which actually included an 850 maximum credit score as an option.

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Michelle Black is an author and leading credit expert with over 13 years 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 up and down the East Coast. 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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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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