June 25, 2017
Consumer Credit Expert
Why your lender’s credit scores look so different from the scores you pulled online
The credit world is positively full of myths and misconceptions. One such misconception is the idea that you have only one credit score (or even one credit score from each of the 3 credit bureaus). In reality, nothing could be farther from the truth.
Have you ever had a lender pull your credit as part of an application for financing and then compared those scores to the credit scores you pulled online yourself? If so, then you are already well aware of the fact that the 2 types of credit scores (lender and consumer) are often very different.
Hundreds of Credit Scores
You may find it difficult to believe, but the truth is that you actually have hundreds of credit scores. If this seems extreme to you keep reading and you will understand how this is possible.
The primary purpose of credit scores is to help lenders predict risk – the risk of doing business with you. Credit scoring models, especially those created by FICO and VantageScore Solutions, are specifically built to predict the likelihood that a consumer will become 90 days (or more) past due on any credit obligation within the next 24 months. Knowing this information helps a lender decide whether or not it is a good investment to approve your loan application and what terms to offer you if you are granted financing.
In order to successfully predict your level of credit risk, credit scoring models look at a variety of factors on your credit reports. Some of the factors which are considered include late payments on your credit reports (or the lack thereof), credit card balances (or the lack thereof) and how those relate to your credit limits. Also, the presence (or absence) of public records, and much more. A credit scoring model will evaluate all of the relevant factors included in your credit report and use that information to assign you a score.
Credit score developers like FICO and VantageScore do not just create one, single piece of credit scoring software and call it a day. Instead, the companies are constantly evaluating consumer financial behavior and credit report trends in an effort to create newer, better scoring models for the future.
As a result, every few years a new credit scoring model is released, sort of like the new software updates which periodically become available for your smart phone. However, just because a new credit scoring model is released, that does not mean the old models disappear. The companies who purchased these older models are still free to use the now outdated product they paid for, just as you are free to continue using an older IOS on your phone.
To add to the confusion (from a consumer standpoint at least), in addition to the different credit score brands and software generations there are different varieties of credit scoring models as well. If you purchased a credit score online you likely purchased a general use or generic credit score. However, lenders often use industry specific credit scores instead. There are industry specific scores used only by auto lenders, mortgage lenders, credit card issuers, insurance companies, and many others as well.
Keeping It All Straight
The truth is you may or may not have access to the specific credit score used by a lender during your loan application. Yet you always have access to the information which is used to generate those credit scores in the first place – your credit reports. If you focus on developing and maintaining smart credit management habits (like paying your bills on time and keeping credit cards paid off monthly) then you can help to ensure that you receive good credit scores regardless of who is pulling them or which credit scoring model they are using.
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Please feel free to contact me if you have any questions.