Why Are Credit Scores Different?

If you’ve shopped around for any kind of loan, one of the things you likely noticed is that the credit score a lender pulls seems to be different, sometimes by quite a wide margin, from what you see when tracking your own credit scores.  What gives?  It comes down to how credit information is reported, which scoring models a lender uses, and how the algorithms work within that scoring model.  Seem complicated, and maybe somewhat confusing?  It is!

How Information Is Reported

Most people know that there are 3 major credit bureaus – Experian, Equifax, and Transunion, but many people don’t realize that scores vary, sometimes immensely between the 3, and for many different reasons.  The biggest reason is that not every creditor reports to every credit bureau.  For example, if you have an account go to collections for non-payment, it’s very possible a collection agency could just report to 1 credit bureau.  Assuming your credit is otherwise in good standing, this could result in 1 bureau (the one receiving the collection data) providing a score much lower than the other 2 bureaus.  This can be a benefit in situations where a lender uses a middle score where really 2 of 3 scores are important.  It can also be a problem in situations where a lender pulls just one bureau, and they happen to pull a report from the bureau reporting negative data.

Which Scoring Model Is Used To Determine Credit Scores?

Most lenders in the mortgage world rely on Fair Isaac, Co scoring algorithms and resulting scores when pulling credit.  You may know them by the acronym FICO.  FICO, however, charges others to use their proprietary algorithms, and for that reason, many credit monitoring services and consumer “perks” they get with credit cards for example, use their own, separate algorithm to generate a score.  These scores are often more difficult to predict, and can be very close to a FICO score or sometimes very far off.  For example, some lenders use a “Vantage” score instead of a FICO score.  To make things more confusing, scores can use completely different metrics to determine if someone has good or bad credit, too.  For example, some industry-specific scoring models use a score range up to 900, while mortgage lenders traditionally use scoring models that go up to 850.  For this reason alone, someone may believe their credit is better (or worse) than it actually is, with the only difference from what they and their lender see being the model being used.

How Algorithms Determine Credit Scores

Algorithms are used by all of the credit scoring models, but each model uses different algorithms that put different weight on the multiple factors that determine a credit score.  For example, one algorithm out there will ignore any and all collection accounts with a balance of $250 or less.   If a consumer pulled a score through that model they might believe they have excellent credit, while a lender using the FICO model might see low scores as a result of collection activity.

While the algorithms weigh factors differently, they all have some things in common.  Of course, an on time payment history is very important to all of the scoring models.  Having a long credit history, regularly using credit, having various types of credit (mortgage, installment loans, credit cards), and keeping credit balances low compared to credit limits are generally habits that all credit scoring models reward consumers for.  Maxed out credit cards, late payments, and major derogatory events like bankruptcy or foreclosure are penalized pretty much across the board as well.

We Can Help Answer Your Questions

John Meussner can help answer questions about your credit, and fill you in on your FICO scores when you apply.  FICO scores are one of the major factors in determining what loan options you’ll have, and the pricing/rates you’ll be offered when applying for a loan, so it’s important to understand how the scoring works to avoid any surprises.  Just as important is knowing that while your consumer-access scores that you get on free credit monitoring services can be a great gauge of the direction your credit is headed and where you stand, the scores your lender will pull are likely going to be a bit different.

With more information and a more in depth explainer, Andrew Yamilkoski of Heartland Credit Restoration put together this helpful video with more insight: