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Scoring Differences

Many times over the years, I have had conversations with folks who told me they had obtained their own credit score, which came out to be X, but once I pulled their credit as part of a home loan application, I would come up with a lower score, sometimes much lower, than their self-obtained score.  This is happening more and more as folks try to actively manage their credit and I would like to tell you why.

What is a Credit Score?

Your credit score is a number generated by a mathematical algorithm — a formula — based on information in your credit report, compared to information on tens of millions of other people. The resulting number is a highly accurate prediction of how likely you are to pay your bills.

If it sounds arcane and unimportant, you couldn’t be more wrong. Credit scores are used extensively, and if you’ve gotten a mortgage, a car loan, a credit card or auto insurance, the rate you received was directly related to your credit score. The higher the number, the better you look to lenders. People with the highest scores get the lowest interest rates.

The Formulas

Within the credit industry, there are many different algorithms that have been created and some of them are as follows:

  • FICO
  • VantageScore
  • CreditXpert
  • NexGen
  • Beacon
  • Emprica

Who uses what?

Most mortgage lenders use the FICO score as it is was developed by the Fair Isaac Corporation and is considered to be the best indicator of a borrower’s likeliness to pay back a debt.  The FICO score, however, was developed, and is owned by, an independent company, not associated with the credit bureaus, and will, therefore, charge the credit bureaus a licensing fee each time a FICO score is generated.  To combat this added cost, the three major credit bureaus have developed their own scoring models (algorithms) and they have also collaborated to create one that all three of them use.

The problem lies in the fact that many times, the credit report you buy and the credit report your mortgage lender obtains are not using the same scoring algorithm and, therefore, not getting the same end resulting score.  For instance, from what I can find online, these are the typical score ranges for some of the scoring models out there:

  • FICO: traditionally between 300 and 850
  • Experian: 330 – 830
  • Equifax: 300 – 850
  • TransUnion: 300 – 850
  • VantageScore: 501 – 990 (often assigned a letter grade, A – F)

Now, let’s say you are near the 65thpercentile of the FICO range (the score typically used by mortgage companies), that would put your score at approximately 677.  The 65th percentile of the VantageScore (the one that is most commonly sold directly to consumers), however, is 818.

What’s the big deal?

Well, the difference in the interest rates for a conventional purchase money mortgage, as of yesterday, that are offered to a person with a 677 score and a 818 score is 1.375%.  That means that a person with a $200,000 home loan and a 677 credit score would pay $169.69 more per month for their home loan — over $61,000 more over life of the loan.

More importantly, however, at the beginning of the home loan process, when I give a quote to someone who as provided me with a self-obtained credit score, it’s crucial that I tell them about this conundrum so that they don’t think I am trying to pull a fast one on them when the time comes for me to pull the industry-standard residential mortgage credit report with that 677 credit score and, in turn, provide them with a quote that has a dramatically increased interest rate.

The bottom line

No matter which scoring model is used, it pays to have a great credit score. Your credit score affects whether you get credit or not, and how high your interest rate will be. A better score can lower your interest rate.

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