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Have you or someone you know ever paid to see your credit score online and then found out that it was different than the credit score pulled by your financial institution? I HAVE! … and here’s why …
“When consumers buy a credit score, they should be aware that a lender may be using a very different score in making a credit decision.” Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), said in an email statement.
The three main credit reporting agencies; Equifax, Experian & Transunion, use their own algorithms to calculate credit scores and they each have several ways to calculate it. Fair Isaac Company also computes and sells more than 50 scoring models for scores. The most used score by financial institutions is the FICO Credit Score. This means that there are numerous variations of a credit score. The good news is, based on CFPB’s research found that most of the scores pulled by consumers and other organizations are consistent by at least 75%. Between 20% – 25% of the scores that consumers purchase were moderately different enough to move them into another credit grade that financial institutions use to determine what consumers may qualify for loan rates. The remaining 1% – 5% of the consumers’ scores was significantly different.
Note: FICO offers a calculator that lists the range of interest rates offered based on FICO score. This of course may differ based on the financial institutions rates offered.
What is not widely known is that there are different types of scoring models based on the information the financial institution or business wants to analyze. For example, a credit score for a credit report pulled by an auto dealership may differ from the credit score for a credit report that is pulled by a financial institution. This is because the auto dealer mainly focuses on consumers’ payment histories on auto loans, regardless of the financing company or financial institution. However, the credit score that financial institutions are based on a consumer’s entire payment history on all trades reporting on the credit report. Another familiar type of scoring model is the one used by Utility Companies.
Regardless of the scoring model, the fact is that if you have good credit, you will have high or good credit scores on them all and if you have “colorful” or bad credit, you will have low or bad credit score on them all. What’s important is that you understand the “Anatomy of the Credit Score.”
- 35% is based on your payment history.
- 30% is based on your balances on your revolving credit lines, like credit cards and lines of credit.
- 15% is based on the length of your credit history.
- 10% is based on the different types of credit you have used.
- 10% is based on the number of new accounts you recently opened and the number of times you allowed creditors to pull your credit report to acquire new credit, also known as “inquiries.”
Other types of scoring modes the financial institutions may use to determine your creditworthiness are Bankruptcy Scores and Fraud Shield Scores.
A Bankruptcy Score determines the likely hood of a consumer to file for bankruptcy. Many lenders use it to determine whether or not they will loan you money. Bankruptcy Scores are not generally shared with the public. The lower the Bankruptcy Score the better. A Bankruptcy Score of 1 – 100 is ideal. A score of 300 to 900 indicates a need to pay down debt especially on revolving lines of credit, like credit cards.
A Fraud Shield Score identifies inconsistencies between application information and credit report data. Just as the credit score, the higher the score the better. If you have low Fraud Score, the lending institution many request or require additional document to verify your identity. Don’t give them a hard time though, it is for your protection.
As with anything, personal finance and credit knowledge is Key to your Prosperity.
STEP 1: Understand where you are with your credit.
- Pull your credit report to see what is reporting. You are able to get a least one free copy of your credit report from all credit bureaus. Go to AnnualCreditreport.com.
- If there are several past due payments or lots of collections reporting, you may want to save your money and work on fixing your credit issues first. Try the myFICO.com Credit Score Calculator to start.
- If all accounts are paid as agreed with no collections reporting, you may want to invest in purchasing your credit score to see where you are.
Start at CreditKarma.com or FreeCreditScore.com. The score may be free, but make sure you read the disclosures to ensure that you are not required to sign up for a monthly monitoring service.
STEP 2: Ask for help.
If you need assistance with restoring your credit or improving your credit to increase your credit score, don’t be afraid to ask for assistance. Below are a few great options to assist you.
STEP 3: Assess your spending habits, budget and savings plan.
This is crucial with rebuilding or maintaining your credit. Here are a few resources to assist you with this.
- Financial Lifestyle Transformation Program – Virtual Self-Paced Financial Coaching Program
- Private Financial Coaching and Counseling
Share your experience below. Was the credit score you purchased the same as the credit score used by your financial institution?
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