When Your Credit Score Really Isn’t Your Credit Score

Robert and Carrie were on the verge of fulfilling a ten year goal of buying their first home. Prior to meeting with a lender, they did their homework, gathered their documents, and ordered their credit reports. They were confused when the scores from each of the three credit bureaus differed so much. Yet all were over 700 with 720 being the highest, so they were confident they would be able to obtain the most favorable loan terms. Imagine their shock then, when the lender told them that their score was only 680 and would not qualify them for the lowest available rate. In fact, the rate they were offered was nearly a full point higher and would cost them an additional $3,000 per year. What went wrong? Why was the lender’s rate so much lower than the scores from their credit reports?

Welcome to the whacky, convoluted world of credit scoring, where reason seems to exist only in the minds of the lenders leaving the rest of us to guess at what they might possibly come up with. It was difficult enough to try to understand how the FICO score works (the original scoring model developed by Fair Isaac Company), now we must contend with at least two other scoring models as well as any number of variations in the way that lenders apply them. The only certainty in the whole credit scoring realm is that borrowers will forever be uncertain as to how lenders will ultimately score them when they are applying for home loans, car loans and credit cards.

The Current Credit Scoring Landscape

At last count, there were three credit scoring models each designed to measure the credit risk of borrowers. The scores generated by each are based on algorithms that crunch mountains of data and statistics compiled from credit histories, and are supposed to be a “predictive” indicator that lenders can use to separate applicants by the level of credit risk they present. As best as anyone can tell, it is all very scientific. The algorithms are highly proprietary and more closely guarded than the President’s security code for launching a nuclear attack. The absolute lack of transparency in any of the scoring models or in the way lenders apply the scores, works to the detriment of borrowers, especially when a seemingly insignificant difference of 10 points can cost them tens of thousands of dollars over the life of a mortgage.

Here’s what we do know. All of the models use the same fundamental components in their weightings. The actual weightings may differ slightly from one model to the next but the components for each are (with estimated FICO weightings): Payment history (35%), debt amount or utilization (30%), length of credit history (15%), new credit (10%) and credit mix (10%).

FICO was the original scorer and it sold its scores to each of the credit bureaus who, in turn resold the scores to lenders and consumers. At some point the credit bureaus, with their mountains of credit data, could stop playing middle-man and start manufacturing their own scores for bigger profits. In their first venture into credit scoring, the credit bureaus banded together to develop and market the Vantage Credit Scoring model. FICO went after them in court, citing anti-trust, but lost. Experian then ventured out to develop its own separate scoring model which they named PLUS.

So now, there are the three models, FICO, Vantage, and PLUS, each with its own weightings, formulas and scoring range, which do change periodically:

  • FICO – 350 to 850
  • Vantage – 501 to 990
  • PLUS – 330 – 830

Which One is the Most Important?

The most important scoring model to borrowers would be the one that is used the most by lenders. The problem is that lenders vary in their use of the different scores. Some use only FICO, while some use some combination of FICO and Vantage. Others take the data and apply their own formula in scoring credit risk. The PLUS score, issued by Experian is not used by lenders at all as it is merely an “educational” score made available to consumers. Right now, FICO is still the primary scorer in the eyes of lenders with a 95% market penetration. Vantage is being used more and more, but often in conjunction with FICO.

If you do order your credit scores from the credit bureaus, it is important to know that the scores you see may differ significantly from what a lender sees. You could go right to FICO to buy your score, but even that may not be precisely what the lenders see when they retrieve your score. The best use of your free credit reports or credit monitoring services is to track your score changes. All of your credit activities can have some scoring impact on a month-to-month basis and it would be important to manage them towards improving your score. When you see improvement in the scores on your credit reports, it is highly likely that your FICO score has improved as well.

It can be frustrating for consumers for whom a few points can mean the difference in qualifying for a loan or saving hundreds or thousands of dollars in interest payments. Under new consumer credit laws and the scrutiny of the newly created Consumer Finance Protection Bureau (CFPB), we are likely to see greater transparency in how credit scores are determined, and how lenders interpolate them. Lenders are now required to divulge which credit score was used in decisions to deny credit for credit cards or offer unfavorable loan terms. That’s progress.

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