The Credit Score Conundrum

When talking to customers, our team will often hear something like, “What? I thought my credit was ____” or “That doesn’t make sense. My credit score from CreditKarma is....” This is so common we wanted to explain how credit scores are determined for those of you that have the same question. In particular, we will focus on credit scores when used in home buying and refinancing transactions.

Lenders use credit scores for one main purpose: As a way to gauge the probability a buyer will default on payments. The lender wants to pick buyers whose credit is good enough that for every roll of the dice, default is unlikely to come up. The higher the probability, the higher the interest rate. The challenge for buyers is understanding what data lenders are using since credit scores come from different sources.

Yes, you heard it right. There is not one credit score. There are many. Here is a primer.

Components of a Credit Score

1. Data sources for a credit score: Typically the data source is the information on your credit report. However, any legal data source could hypothetically be used to help inform a credit score. For example, there are companies that have explored how to incorporate your social media data into a credit score. But that is a discussion for another day. For the sake of this article, we assume data is your credit report only and comes from one of the three main data sources: Experian, TransUnion, or Equifax.
2. Date a credit score was pulled: A credit score is a measure of your financial health, according to a given credit bureau, at a specific moment in time. If a credit card company reports a late payment, or that you paid off your debt, the score calculated after that data is incorporated will be different from your previous score.
3. The company compiling the credit score: People usually associate FICO with credit scores. FICO is the trademark of Fair Isaac Company, which is a company that uses data from credit bureaus to create a credit score. But they are not the only company that issue credit scores. Another example is VantageScore Solutions which creates the VantageScore.
4. The credit score model: Each company sometimes has different models or versions of the credit score, like a car company with cars that may appear similar but have different features. Some credit score models could be updated models that are better, or others predict different things in relation to credit. For example, FICO has models that are more accurate in predicting auto loan late payments or credit card late payments. And did you know that FICO has about 28 different models?

Of Math and Mortgages

So what does this all mean and in particular how does it affect you in home financing? In mortgages, the vast majority of lenders either use FICO V2, V4, or V5. If you are visiting CreditKarma, you are seeing a VantageScore 3.0. If your credit company or bank sends you a credit score in your monthly statement, you may be seeing a FICO V8.

All of these scores measure your general credit health, but the difference between models can be significant. For example, at the time of writing this article the difference between my VantageScore 3.0 and FICO V8 was 27 points. That may not seem like a lot when the range of scores is between a 350-850, but many lenders will give the best rates to buyers with scores above 720. If you come in with a 719, even though it is only 1 point away, the mortgage rate offered to you could go up. Small changes in interest rates can have large impacts to total cost in mortgages. An interest rate change of just .125% or 1/8th of one percent can equate to over $10,000 more paid on a $400,000 mortgage over 30 years.

At Own Up, we strive to bring education and transparency to a complicated process. Knowing exactly what credit scores lenders use and the exact score they will see in advance of them accessing it makes you more prepared. Right now, Experian offers a free FICO 8 score which is, at least, from the same company lenders will use when evaluating you for a mortgage. Experian also offers the opportunity to purchase your FICO V2 score for $4.95 so you can get an apples to apples comparison when you are ready to buy a house and want to look for the best mortgage rates.