A reader recently wrote asking about credit scores. She wanted to understand why the credit rating she received from the credit bureaus was different from the rating used by her bank. Here is his question:
Question: I like to read your blog. I have a question about credit scores. I checked my credit scores with all three credit bureaus, and was happy to see that my scores were all well above 600 for each of the bureaus.
Then I went to my credit union. To my surprise, the manager, after checking my scores against their system, [said my credit] was way below what I saw with the desks.
She told me that the credit score that we as consumers see with bureaus is always higher than what lenders such as credit unions and banks see. My question to you is: is this really true? If so, how can we as consumers get our true credit score before going to the lender?
A: So what is going on here? Several things. First, let’s think about credit scores in general. How are they calculated? You need two things to calculate a credit score: data and a credit score formula.
The data comes from the credit bureaus – TransUnion, Experian and Equifax. Each bureau compiles data on your bill payment habits, late payments, credit limits, credit usage, inquiries, and more. To calculate a credit score, this data must be associated with a formula.
The most widely recognized formula comes from FICO. (There are a few competing formulas on the market, but FICO is still the most widely used by the majority of lenders.) We need both of these to generate a credit score.
There are, however, a few issues that we might run into that can lead to different credit scores. The first is that the information on your credit report can vary from one credit bureau to another. For the most part, the data will be similar, but there will likely be some differences.
Why? Well, you may have a car loan or a bank loan that is not reported to all three credit bureaus. The creditor can only report one or two of them. So one will have the information, but not the others. There may be errors in one of your credit reports, which is actually quite common. It is not uncommon to check your credit report and find differences between each of the three major bureaus. So that’s part of what’s going to lead to different credit scores.
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The second reason, which is actually even more problematic, is that there are several credit scoring formulas. Even FICO, which you’ve probably come across, has several different scoring formulas.
There are several reasons for this. FICO is constantly changing its credit scoring formula to get the most predictive tool possible. The goal is to get a formula that accurately predicts credit risk, and they are constantly adjusting the formula to achieve that goal. Some lenders may choose to use the newer version of the formula, but others may continue to use older versions. (Keep in mind that updating their systems to the latest FICO formula usually costs lenders money.)
The second problem is that some lenders and industries have customized versions of the FICO formula. For example, the FICO formula used on your credit report when you apply for a home loan may be different from the formula used when you apply for a credit card.
And there is yet another problem. Lenders can further customize their processes on their own. Some lenders take other information into account outside of your FICO score or even your credit report. Some develop their own formulas – or use a formula that was not developed by FICO. And some take into account other information they may have about you.
So, even though we are looking at the exact same data from the credit bureaus, there are still many formulas for generating a credit score. And this leads each individual to have a variety of possible credit scores. As a result, your lender can see and in most cases likely sees a different credit score than you may have obtained from one of the credit bureaus or even directly from FICO.
This is the bad news.
The good news is, if you check your credit score through FICO, it will likely be reasonably close to what most lenders will see. I know “reasonably” and “most” are caveats here. You could end up with a lender who either does not use the FICO score or uses an older version of the formula.
As for the reader’s question, is it still the case that the score you get from a FICO, Experiential Credit Karma or other providers score higher than the score a lender sees? Absolutely not. In fact, I know from personal experience when applying for mortgages that sometimes the score a lender gets is higher than what you get on your own. So your score could be higher or lower for a lender than for you. You do not know.
There are a few other things to consider. If you check your score in January and then apply for a loan in March, your scores might be different just because there is more information on your credit report. When your score is pulled in March, the lender uses the most recent data from the credit bureaus.
In addition, whatever formulas you use, you will follow the same steps to improve your score. Paying your bills on time, keeping credit card balances low, and leaving old accounts open will help boost your score.
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Experian Boost Disclaimer – Results may vary. Some may not see improvement in scores or chances of approval. Not all lenders use Experian credit files, and not all lenders use Experian Boost impacted scores.
If you are looking for a loan, the best place to find the score most likely to be used by lenders is directly with FICO. You can click here to be taken to the FICO website, where you can view your FICO score.
Another option is to check out Credit Karma and / or Credit Sesame. I did a study based on my own credit scores to see how surprisingly close their (free!) Scores were. Additionally, these services can show you what is helping your scores and what is hurting your scores. Even if the number isn’t perfect, you can get a feel for what you’re doing well and what you could do better if you need to improve your credit score.
And if you’re looking for a big purchase, like a home or mortgage refinance, this information can be invaluable.