Myth: You Can Bank on Your Credit Score

Fact: Your online credit score is not the score that your lender uses to qualify you for a loan.

Do you have poor, average, good, or excellent credit?

Knowing your credit rating is important, but credit scores can be misleading, because there is no such thing as a singular score.

Ask mortgage broker Dave Kramer. He’ll tell you many clients come to him with their online credit scores expecting the best interest rates, but when he runs their credit, he discovers their credit may not be so excellent.

Clients are understandably upset when they learn that their 760 does not qualify them for the lowest mortgage rates, which generally require a 740 score or better. How can this be?

According to Dave, there is almost universal misunderstanding about credit scores and what they mean. “Most people think a high score means good credit, which is generally true. But not all scores are created equal.” As a matter of fact, each individual has over 50 credit scores, and they are all different.

Surprised?  So was I.  But here’s why:

FICO Scores

You may know that there are three major national credit bureaus: Equifax, Experian and TransUnion. All three use FICO scoring models to measure your creditworthiness based on a number of factors including payment history, overall debt burden and types of credit used (installment, revolving, consumer finance, mortgage). As each bureau uses its own version of FICO and maintains its own consumer files, FICO scores typically vary.

Adding to the confusion, there are several types of FICO scores including classic, bankcard, personal finance, mortgage, and auto. Each score uses its own rating system. The classic and mortgage scores range between 300 and 850, while bankcard and auto scores range between 250 and 900. On top of this, there are different scoring models, including Pinnacle, Beacon, Risk, and VantageScore. When you do the math – three credit bureaus (each with its own consumer database) times several scoring models times several types of scores – it’s easy to understand why you have so many scores.

But this tells only half the story.

The score you see on your online credit report is not the same score that banks and credit card companies use to qualify you for a loan or line of credit. As a consumer, you see one score. As businesses, they see another. According to Dave, consumers do not have direct access to the scores that business use to evaluate their creditworthiness.

It’s no wonder, then, that some of Dave’s beaming clients with 700+ credit scores need to lower their expectations. Unknown to them, their online credit scores may be based on a bankcard rather than mortgage scale. While bankcard-scaled scores tend to be higher – with an upper limit of 900 versus 850 – they may not make the cut for a mortgage loan.

Do Not Fixate on Credit Scores

Dave says do not fixate on learning your actual score before applying for a loan, because you can’t. The only way to find your actual score is from your lender after he checks your credit.

Ordering Your Credit Report

Once a year, you can order a free credit report from each of the major bureaus at annualcreditreport.com. These reports are not scored, and they can be difficult to read, but they offer the best indication of what potential lenders and creditors will see when you apply for a loan or credit card. If you can’t shake the need to know, you can always order your score from a third party vendor for a fee.

While a third party score may place you in the ballpark, Dave cautions that you can’t take it to the bank. Instead of focusing on a number, concentrate your efforts on maintaining good credit by paying your bills on time and avoiding excessive debt. When you do, your scores will generally be as good as they need to be. (An 810 score will not get you a better mortgage rate than a 760.)

If your need help reading your credit report or have questions about qualifying for a mortgage loan, feel free to contact Dave at “The $500 Cup of Coffee.”