Content provided courtesy of USAA | By Mikel Van Cleve
Buying a car, starting a business, buying a house: Sometimes it seems that life’s biggest steps depend on one number, your credit score.
What do credit scores mean? Why do they matter? What can you do about yours? There are lots of myths to debunk and questions to answer, and over the past 14 years I have pretty much heard them all.
Question: Why is the score the lender told me different from the score I see when I check my credit?
A friend of mine recently applied for a vehicle loan. She checked her credit score first and was surprised to see a score 100 points higher than the score her lender referenced. While the difference isn’t always this extreme, it can come as a shock and cause a bit of confusion — or even anger — when it results in a loan decline or higher interest rate.
Here’s why: You don’t have a credit score; you have credit scores.
Accessing one universally agreed-upon credit score sure would make life easier, but that’s just not the case — not even close. FICO®, the most common household name for credit scores, is a data analytics company that has developed models for generating credit scores based on information in your credit reports (more than one of those as well). You have an Experian FICO® score based on information in your Experian credit report, an Equifax FICO® score based on that information, and a Transunion FICO® score based on that report.
If only it stopped there. FICO® has numerous models. For example, there are FICO® Score 8 and FICO® Auto Score 8, and a version of each based on information from each credit report. Then there are the versions before FICO® Score 8. And then there are ones specific to credit cards and mortgages, not to mention multiple versions of the new FICO® Score 9 model based on information from each of the three credit reporting agencies. And just think, we haven’t even touched on the other credit scores beyond FICO®, such as the VantageScore®, which also has multiple versions.
Keep this in mind: The score you see isn’t right, and the one the lender uses isn’t wrong.
As you can guess, the likelihood you’ll view the same score as your lender is low. Lenders may choose product-specific scoring models (such as FICO® Auto Score for an auto loan) because of the different risk involved in lending money for different products. They may also pull your credit information from a different credit reporting bureau from the one you checked, and the model could be version 8 or 9 or something else. No one credit score is more accurate than another, nor is it intended to mislead you as the consumer.
Having said that, your lender will use the score he or she accesses. It’s helpful for you to check your credit score, but consider it only for educational purposes, not as the end-all, be-all. And take heart: Your credit score is not the only factor used in the underwriting decision. Lenders may also look at factors such as your debt-to-income ratio and account history.
Remember: The story your credit report tells is more important than the score itself.
The score is simply a numerical reflection of what is in your report. If you are declined for a loan (or receive an interest rate less favorable than expected) because of your credit, focus on the information within your report. Depending on the credit scoring model used, some things are weighted more heavily than others, which leads to the differences. Behaviors to focus on include always making payments on time, keeping credit card balances low, and only establishing new credit when necessary. When you review your credit report, look for:
Incorrect information, which is more common than you might think and should be disputed immediately.
Late payments and collections, which can really hurt your score.
Utilization, the amount you owe versus the amount of available credit. The higher your utilization, the lower your score.
Past mistakes don’t have to haunt you forever. If you focus on what you can control and improve going forward, your score will follow over time.
At least once per year, review all three of your credit reports: Experian, Equifax and Transunion. You can visit www.annualcreditreport.com to obtain these reports for free. Keep in mind, this is for a free credit report, not one of your credit scores.