I often get asked the question about why credit scores are different from one credit bureau to another. Here's the answer. This content is courtesy of AR associate, George Souto
Why Are Credit Scores Different Between The Three Credit Bureaus? In my opinion the three most important things in obtaining a mortgage are Income, Debt, and Credit Scores. The first two are self explanatory, but the third, "credit Scores" are not as easy to explain. So it is important for us in the Mortgage and Real Estate Industries to be well informed on how Credit Scores work, so that we can better assist our Borrowers and Buyers in obtaining the house of their dreams.
Yesterday I wrote a post Why We Have Credit Scores, How They Were Created, & How They Are Used? Yesterday's blog hopefully provided a basic understanding of a seemingly mysterious concept called Credit Scores. As the title implies, in yesterday's post I provided a basic history of "Credit Scores", as well as an introduction into some of the "Credit Score Models" that are used today. Some of the better known Credit Score Models are:
- Consumer Models also know as Educational Models
- Collection Models, Bankruptcy Models
- Bankruptcy Model
- Auto Models
- And the one that those of us in the Mortgage and Real Estate industry are most concerned with the Mortgage Models.
In this Post I want to go a little more in-depth into the two Credit Score Models that most affect the Mortgage and Real Estate Industries, Consumer/Educational Model, and the Mortgage Model.
How many times have you heard a Borrower/Buyer blame a Loan Originator for having lowered their Credit Score because they pulled a new Credit Report on them? They are convinced that the lower score is the Loan Originator fault, because when they pulled their own Credit Report it was 30 to 60 points higher. Therefore the Loan Officer has to be at fault. It is the only explanation that makes sense to them for their Scores dropping so much. It is understandable for a Borrower/Buyer to feel this way, however, they are incorrect in their assumption. Credit Scores do not drop by huge amounts just because a Loan Officer pulled a new Credit Report, in fact the change is minimal if any at all. The reason for the difference is because the Borrower/Buyer and the Loan Originator used two different Credit Report Models.
When a Borrower/Buyer pulls their own Credit Report through one of the “Free Credit Report Sites” the model used is a Consumer Model. But when a Loan Originator pulls the same persons Credit Report the model used is a Mortgage Model. Even though the information used by both models is the same, the weight given to each “Trade Line” is different. A Mortgage Model is going to place a higher weight on “Trade Lines” which have a greater impact on a mortgage then a Consumer Model will. Also a Mortgage Model tends to be more conservative in its Scoring than a Consumer Models.
Furthermore, there can be a big fluctuation in Credit Scores between the three major Credit Bureaus Equifax, Experian, and TransUnion. The main reason is because not all Creditors report their information to all three Credit Bureaus. So one Credit Bureau might be basing their score on more or less information than the others.
This is why it is not unusual to for all three Credit Bureaus to not report on all the Trade Line of a Credit Report. For example Equifax, and Experian might be reporting on the same Trade Line, but not TransUnion. But even if all creditors reported to all three Credit Bureaus, and all three had the same information, the Credit Scores would still be different for all three Credit Bureaus, because each one uses a different algorithm to arrive at their score.
There has been an effort since 2005 to try to correct this discrepancy in Credit Scores by implementing a new scoring system known as VantageScore. VantageScore would have many advantages over the present Credit Report System since scoring would be consistent, and easier to understand. However, in order for VantageScore to work, all three Credit Bureaus will need to agree to use the same scoring algorithm, and the three Credit Bureaus have yet to agree to do this.
I hope yesterdays posts Why We Have Credit Scores, How They Were Created, & How They Are Used? And this post Why Are Credit Scores Different Between The Three Credit Bureaus? Will help to clarify some of the mystery surrounding Credit Scores, as well as eliminate some of the myths about the cause for the fluctuations in Credit Scores.
Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or firstname.lastname@example.org