In this digital world where credit monitoring websites, credit card companies, and banks all offer free credit scores, you can receive your credit score with just a few clicks. Have you ever noticed your credit score may differ by source? The score you see on a credit monitoring website such as Credit Karma may differ from the credit score your bank provides, and both of those scores may be different from the credit score your credit card lists. Why is this, and does it matter?
Lenders use credit scores to evaluate the creditworthiness of borrowers. Lenders look at historical data to estimate borrowers’ probability of making payments on time or defaulting on a loan.
The three credit reporting bureaus (Experian, Equifax, and TransUnion) all collect credit data on you. The credit information is used to calculate your credit score, but the three credit reporting bureaus do not calculate the credit score themselves. Your credit score is calculated by several companies using scoring models. The most well-known scoring models are FICO and VantageScore. How these companies calculate your credit score differs, and their scoring models are always changing. Currently, the most used FICO scoring model is FICO 8, and the most used VantageScore is model 3.0. For our purposes, we’ll focus on these two scoring models.
The FICO 8 scoring model uses five categories to calculate your credit score. Each category is weighted on a percentage basis.
VantageScore 3.0 scoring model uses six categories to calculate your credit score. VantageScore’s categories are also weighed on a percentage basis.
Yes, your credit score may vary even if the same scoring model is used. This is because lenders are required to report credit data to any one of the three credit reporting bureaus. Lenders are not required to provide data to all three credit bureaus. Reporting to one credit reporting bureau is more common with local credit unions as it costs lenders money to report your credit information.
Your credit score also may vary depending on when lenders provide information to the credit bureaus. If there is a lag in reported credit information, your credit score may be slightly different.
Every lender has different needs and varying appetites for risk. The risks of a bank issuing a three-year auto loan versus the same bank writing a thirty-year mortgage are different, and different scoring models may be used to assess those risks.
FICO 8 and VantageScore 3.0 both use scoring models that range from 300 to 850
|Poor||300 – 579|
|Fair||580 – 669|
|Good||670 – 739|
|Very Good||740 – 799|
|Exceptional||800 – 850|
|Poor||300 – 600|
|Fair||601 – 660|
|Good||661 – 780|
|Exceptional||781 – 850|
The Fair Credit Reporting Act (FCRA) requires all three credit reporting bureaus — Equifax, Experian, and TransUnion — to make available at your request a free copy of your credit report. The three credit reporting bureaus are required by the terms of the Fair Credit Reporting Act to provide this free credit report once every 12 months.
You can get your credit report by following the links below:
When checking your credit report, it is important to look for inaccuracies—and dispute any you may find.
You can file a dispute to correct an error on your credit report online or by mail. Every credit bureau has a similar but different process to file a dispute.
You will need to provide supporting documents to prove who you are (IDs, Social Security Number, utility bill), information about the believed error (account numbers, statements, payment history, a letter explaining the dispute), and other information.
You can find more information at the links below:
As lenders begin to use updated credit scoring models over time, you may see a change in your credit score. It is essential that you routinely check-in and monitor your credit. Knowing which scoring model your lender uses may help you determine whether your application is more likely to be accepted or declined and what rate you may receive.
Author: Christopher T. Smith, Financial Planner | Allegheny Financial Group | February 2021
Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.