If you’ve shopped around for a mortgage loan, one of the things you’ve likely seen is that credit scores lenders pull tend to be different (sometimes by quite a lot) from what you see when tracking your own credit scores.  Why is that?  It comes down to how credit information is reported, which scoring models a lender uses, and how the algorithms work within that scoring model.  Seem confusing, and maybe a little bit more than a little complicated?  It can be!

How Information Is Reported

Most people know that there are 3 major credit bureaus – Experian, Equifax, and Transunion, but many people don’t realize that scores vary, sometimes by a large margin, between the 3.  The biggest reason is that not every creditor reports to every credit bureau.  For example, if you have an account go to collections for non-payment, it’s  possible a collection agency might report to 1 credit bureau.  Assuming your credit is otherwise in good standing, this could result in 1 bureau (the one with accurate collection data) providing a score much lower than the other bureaus.  This can be a benefit in situations where a lender uses a middle score where really 2 of 3 scores are important.  It can also be a problem in situations where a lender pulls just one bureau, and they happen to pull the worst score, leaving out higher scores completely.

Which Credit Scoring Model Is Used To Determine Credit Scores?

Most lenders in the mortgage world rely on Fair Isaac Corporation’s scoring algorithms and resulting scores when running your credit.  You may know them by the acronym FICO.  FICO, however, charges others to use their proprietary algorithms, and for that reason, many credit monitoring services and consumer “perks” they get with credit cards for example, use their own, separate algorithm to generate a score.  These scores are often more difficult to predict, and can be very close to a FICO score or sometimes very far off.  For example, some lenders use a “Vantage” score instead of a FICO score.  To make things more confusing, scores can use completely different metrics to determine if someone has good or bad credit, too.  For example, some industry-specific scoring models use a score range up to 900, while mortgage lenders traditionally use scoring models that go up to 850.  For this reason alone, someone may believe their credit is better (or worse) than it actually is, with the only difference from what they and their lender see being the model being used.

How Algorithms Determine Credit Scores

Algorithms are used by all of the credit scoring models, but each model uses different algorithms that put different weight on the multiple factors that determine a credit score.  For example, one algorithm out there will ignore any and all collection accounts with a balance of $250 or less.   If a consumer pulled a score through that model they might believe they have excellent credit, while a lender using the FICO model might see low scores as a result of collection activity.

While the algorithms weigh factors differently, they all have some things in common.  Of course, an on time payment history is very important to all of the scoring models.  Having a long credit history, regularly using credit, having various types of credit (mortgage, installment loans, credit cards), and keeping credit balances low compared to credit limits are generally habits that all credit scoring models reward consumers for.  Maxed out credit cards, late payments, and major derogatory events like bankruptcy or foreclosure are penalized pretty much across the board as well.

We Can Help Answer Your Questions

Your MasonMac loan officer can help answer any questions you may have about your credit, and fill you in on your FICO scores when you apply.  FICO scores are one of the major factors in determining what loan options you’ll have, and the pricing/rates you’ll be offered when applying for a loan, so it’s important to understand how the scoring works to avoid any surprises.  Just as important is knowing that while your consumer-access scores that you get on free credit monitoring services can be a great gauge of the direction your credit is headed and where you stand, the scores your lender will pull are likely going to be a bit different.

With more information and a more in depth explainer, Andrew Yamilkoski of Heartland Credit Restoration put together this helpful video with more insight:

The post Why Credit Scoring Models Show Different Scores appeared first on Mason-McDuffie Mortgage Corporation.

When applying for debt, a lot of weight is put on credit scoring. The difference between ultra competitive rates, terms, and lenders practically begging for your business and seeing terms that come with astronomical rates and costs can sometimes be just a few points in credit scoring. Most people know that paying bills on time is key to having great credit, but many people fail to realize there are other aspects of managing credit that have a major impact as well. And while paying bills on time is the MOST important thing you can do to ensure you have a good credit score, knowing ALL of the other things you can do to improve your scores can collectively have a similar impact, for better or worse.

Some major credit events like Bankruptcies, foreclosures, or repossessions, can hang around on a credit report and negatively impact scores for a long time. Some other things the credit bureaus view as negatives, though, can be quick fixes that can substantially increase credit scores, and fast! If you’ll soon be applying for credit, these are some things to consider taking action on before you apply to make sure you maximize your chances to get the best rates and loan terms.

Paying Down Your Debt (not paying off!)

One thing credit bureaus take into consideration in a big way when determining your credit score is the amount of debt you’re using compared to the amount of credit you have available. This is called your credit utilization ratio, and it plays a big role in your credit scores. Scores are impacted by both individual accounts, AND your entire credit profile. For example, if you have a $1000 credit limit on a credit card with a $900 balance, that would be a 90% ratio. If you have 2 cards, one with a $1000 limit and $700 balance, and another with a $2000 limit and a $1500 balance, that would be a total 73% ratio (all limits divided by all balances). To maximize your credit scores, you should aim to use less than 25% of all the credit extended to you. So if you have a card with $1000 as a limit, don’t exceed $250 as a balance. The good news though, is that if you pay down a card that is close to maxed out, the positive impact on your credit scores happens quickly, as soon as the updated balance is reported to the credit bureaus!

Because the credit bureaus look at individual accounts AND your collective credit, if you have a lot of cards that are maxed out, it may help your scores more to pay MOST of the balances on many cards instead of ALL the balances on a few cards. And always ask a credit expert before you pay off a card – having low balances is good, but paying off and closing your cards can actually have a negative impact on your scores. Banks want to know you can responsibly use your credit, so keeping small balances and paying them down or off regularly will maximize your scores.

Make a phone call!

These days, you may not even need to make a call! Most creditors (for credit cards) have the option to request credit line increases. In some cases, small line increases don’t even require a credit pull – so you can avoid an inquiry, and get your available credit increased. Why would you do this? Because the ratios noted above work in your favor when you pay down debt, but they are really looking at the % of debt you’re using. So if you have a $1000 credit limit card that is maxed out with a $1000 balance – you could pay it down to $500 to get to a 50% credit utilization ratio, OR, you could request a credit line increase to $2000, which would also get you to that same 50% ratio, without you spending a dime.

This is an affordable way to almost instantly boost credit scores. Keep in mind though, this works best if you already have good to excellent credit, because lenders often require a good credit history to grant increases to your credit lines.

Dispute & Delete

According to CNBC, 34% of Americans have found at least one error on their credit report. Credit bureaus are charged with making corrections and providing accurate data, but they can only work off of the data they receive. We recommend looking at your credit annually to check for mistakes. If there’s anything negative on your credit that doesn’t belong to you, you can dispute it and request the credit bureaus delete it. This can happen for many reasons, but regardless of why there is incorrect info on your report, it’s important to fix it, and once updated, your scores should improve accordingly!

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