Stop obsessing about your credit score. Don’t pay for those services to monitor them or get a number. Relax, ignore the scare-based tactics. Your credit score depends on who pulls the report and how. This is the secret the credit score industry doesn’t want you to know.
Is a good credit score important? Absolutely, but don’t stress over 20-50 points. People have jumped through hoops to squeeze out a couple of points and pride themselves on having an 800 score and it’s not even the real number.
Everything that a lender or mortgage broker told you? Probably second-hand and perhaps even misleading, unless they are in senior management and run the credit department.
How did I discover this secret? Simple, I had to dig. I created the credit department for a bank and was a business lender for years, yet I never questioned the origins of the FICO score because that was just how business was done. You contract with the credit rating company, you tell them what you want the score is for, and you get the customer’s credit rating.
First let’s define what is the credit score. A person’s credit score, or FICO score (the most commonly used credit score), was created by the Fair Isaacs corporation. They are the big daddy in the credit industry. The FICO score is calculated using a proprietary formula that weighs the amount of debt you carry relative to your available credit, the timeliness of your payments, the type of debt you carry, and other factors to assign a score between 300 and 850. The company mines data about consumer information and habits. They then throw all this into a big vat of calculations to predict what you would do about repaying debt. The top 20% of credit profiles receive a score over 780 and the lowest 20% receive scores under 620. They then sell their services to companies throughout the United States in many different industries.
One day there was a business borrower who I really believed in. Our FICO cut off was 720 for me to approve his business loan. I could have stretched in certain ways but not about the FICO score. That was a line in the sand that we don’t cross unless we wanted to get slapped by federal bank regulators and lose our jobs.
The small business owner’s score was in the high 600s. I sat with him and went over what he needed to do to raise his score. I gave him tips and secrets and told him to come back in six months. He showed up at my office three weeks later with a lovely piece of paper from a credit agency that showed his FICO score at 785. I was rather surprise that his score would change so drastically in such a short time but I went ahead and requested his score again. It came back as the exact same number that we had before.
Now, at this point, I was confused because the report he had showed clearly indicated FICO score and it’s from the same credit agency that I bought the score. I thought that maybe my system had saved the data so I requested it directly from my credit department. Lo and behold, it’s still the same exact score. I then asked my mortgage department, a different department at the bank, to pull the score for me. They came back with a third, completely different FICO score.
I told the customer to come back in a week and give my system time to update the data. The following week, his score was now worse than it was originally because we had pulled so many credit reports in such a short time. I was willing to go the extra mile to help this business owner so I fought for the next two weeks to find the answers from my credit agency vendor. I wanted to understand what was going on and I had the clout to access senior management.
It turns out that there can be hundreds of different credit scores for the same exact person.
Your mortgage lender is going to be interested in totally different things than the auto dealership. When you walk in the door and the car dealer pull your credit score, it will be a different one than the one that your banker pulls at the exact same time. The scores can vary as high as a couple of hundred points depending upon the circumstances and the exact product that those lenders bought.
A FICO score can be calculated differently depending upon a specific lender’s preferences. Think of it like customizing a cooking recipe.
The car dealership tells Fair Isaacs, “I want something sour”. So Fair Isaacs will pull out the various statistics about you from their cauldron to make something sour. The mortgage lender, on the other hand, prefers something sour with a bit of salt so he will get a different flavor made from slightly different data. This process is repeated by every different company that requests your credit score. Aside from preferences, pricing will also make a difference in what your score looks like. Why? Because the company is paying for less data if they go cheap so they get a different score than someone who went for the deluxe package.
Now to make it even more confusing, there are three different credit bureau agencies who collect almost the same data but not quite. They compete with each other for business and tout their own score as being the most accurate. So if mortgage lender A chooses Fair Isaacs, your score might be 726 but mortgage lender B chooses Trans Union, your score might be 702.
That credit score that you paid good money for directly from the credit agencies? Bogus. It’s based on completely different formulas than what lenders actually use. It’s meant to make you feel good. The number is somewhere in the ballpark if you haven’t made any recent changes. Your changes will affect the score that you buy overnight but the lenders’ scores will take months before the system feels comfortable about integrating it into the formulas.
So the next time someone boasts about their perfect or amazing credit score, just let them feel good and be secure that you know the truth.
Are there any secrets or tips that you can share with our readers about credit scores?
© 2010 MoneyandRisk.com all rights reserved
photo credit: fairy tales
If you’re a stay at home mom or dad, did you know that you can still be contributing to your own retirement account?
