October 15, 2008
by Edward Jamison, Esq.
We’ve all seen them - the never-ending television ads and radio commercials with the catchy jingle for free credit reports and scores.
Nowadays a number of similar companies are offering free credit reports and scores. With all of these ads for freebies, it’s no wonder that so many consumers believe that all credit scores are created equally.
First, a little history on credit scores:
A company called the Fair Isaac Corporation created the first credit score. It was made available to lenders in the very late 80s and soon thereafter began to pick up momentum and popularity in the lending world. The FICO score became the gold standard in the mortgage lending world when Fannie Mae and Freddie Mac endorsed its use for evaluating mortgage loan applications in the mid 90s.
For years the FICO score was a mystery to consumers and was only known by the lending industry. Credit scores have only recently been made available to the public in the last few years. In 2001, California passed a law that required credit scores to be made available to California residents.
This pretty much opened the floodgates for the rest of us.
It also turned into a cash cow for the bureaus. However, for two of the three, instead of selling the actual FICO score, where they had to pay royalties to the Fair Isaac Corporation - they created their own scores to sell to consumers.
That’s where the confusion started.
Now that the bureaus all sell scores targeted at the consumer market, many unknowing consumers assume that these scores are the same scores a lender would see. Unfortunately, this is just not the case and it often causes a lot of confusion for those that are looking to refinance a mortgage or trying to qualify for a new car loan.
Take Steven and Veronica Blanco for example. To get a better understanding of where they stood credit wise, they went online and paid for all six of his and his wife’s credit scores - one for each of them from each of the three major credit bureaus.
Between the two of them, their scores ranged from a high of 732 to a low of 705. Knowing that mortgage lenders typically go with the middle scores, Steven assumed that they would be fine in qualifying for a new home loan at a decent rate.
But when the couple applied for a mortgage loan through their credit union, they were shocked to find out that the credit scores their lender pulled were significantly lower, ranging from 645 to 672. After talking with their lender at length they learned that even though they had purchased their scores from one of the three major credit bureaus, the scores they purchased were not the same scores that lenders use.
So what score is the right score and where can I find it online?
Here’s the deal…the industry standard for credit scores is still the FICO score. The FICO score is the score that most lenders use when determining your eligibility and terms for a loan. While the FICO score is not the only credit score that lenders use, it is the most widely used with more than 90% of lenders using it to make their lending decisions.
The easiest and most convenient site to order your FICO credit scores is through Fair Isaac’s consumer website: www.myFICO.com.
This is the only site where consumers can order all three of their FICO credit scores from all three credit bureaus. You can also order scores from the credit bureau websites directly but you should be aware that you’re not necessarily going to get a score that lenders use.
While these scores are pretty much worthless in the lending environment, they are a constant source of revenue for the bureaus at the consumer level. Let’s take a look at what each of the three major credit bureaus offer to consumers:
Equifax
Equifax is the only bureau website that you can order your FICO score from directly - without having to search for an obscure alternate web address. The score is marketed as Score Power.
When you visit their website you’ll notice that they explain that the score that you’re purchasing is in fact a FICO score. The problem is that you’re only able to get the Equifax FICO score from this site and we all have three FICO scores - one from each of the three major credit reporting agencies.
Experian
Experian markets and sells the PLUS Score on their website. They also have a half dozen other websites marketed under different brands that also sell their Plus Score. Be very careful when watching commercials about free credit reports; that’s one of their marketing tactics.
If you’ve purchased a score from Experian or one of their consumer sites, you didn’t get your FICO score.
TransUnion
TransUnion sells the TransRisk score under their ‘TrueCredit’ brand. Their TransRisk score is also available for sale to lenders but it just isn’t commonly used.
TransUnion does sell the legitimate FICO credit score to consumers, but it’s only marketed at their TransUnion Consumer Services website at www.transunioncs.com.
As you can see, this site is almost impossible to find unless you know the exact website address. Just try Googling the consumer services division and you’ll see what I mean.
While these are only the websites of the major players, there are tons of other sites out there that offer credit reports and scores. The easiest way to be sure that you’re ordering a FICO score is to read the fine print. If it’s a FICO score, it’ll say so.
Buyer beware!
It seems that everyone is talking about credit scores these days, and with good reason: Having a lower credit score can mean paying higher interest rates which translates to more dollars out of your pocket.
Credit scores (also sometimes referred to as FICO scores) range from 400 to 900, and the higher the better. Each of the three credit repositories in the US (Experian, Equifax and TransUnion) keep tabs on each individual and issues a score based on a complex mathematical formula. For mortgage lending purposes, lenders typically discard the highest and lowest scores, and use the middle score. In the case of joint borrowers, the lower of the two middle scores from each borrower is used.
The middle score is not necessarily an average of the three scores; rather each repository determines their own scores based on the information that has been reported to them by creditors. Since most creditors report to all three companies, scores will generally be close to one another.
What can you do to raise your score? There are a number of things that impact your rating and some simple things you can do on your own to improve your standing.
Besides avoiding the obvious credit score-killers like bankruptcies, foreclosures and judgements, the best thing one can do to maintain a favorable rating is also the most common sense - pay your bills on time. If a company is considering extending credit to you, they’ll want a reasonable assurance that you’ll pay back the debt in a timely fashion. How you’ve handled your finances in the past is the best predictor of what creditors can expect in the future.
Next is to not overextend your use of credit. In other words, don’t max out your credit cards. This is important because the proportion of balances to limits accounts for 25-30% of your score. I tell my clients to never let their credit card balances exceed more than 30% of the maximum credit limit. For example, a card with a $5000 limit should never have a balance exceeding $1500. Otherwise, the computer model that determines your score “thinks” than you’re using too much credit, and maybe using it to live day to day. A better approach would be to spread balances out over more accounts, or, in some cases, to request an increase to the credit limit on a particular card. Just don’t be tempted to use that extra credit!
Don’t ignore collection notices from past due accounts, even for seemingly small things like parking tickets, library fines, etc. More and more government agencies are turning to collection agencies to collect the money they’re owed. A collection showing on your credit report can reduce your score by nearly 100 points - a huge price to pay for ignoring a $25 ticket.
I’m often asked if it helps one’s score to close accounts. The answer is both yes and no, depending on the accounts. Older accounts should be saved; the length of your credit history counts as much as 15% of your total score. So if you’re looking to close out accounts, choose those that are relatively new.
On that subject, don’t make a practice of opening new accounts simply to save the 10% that the merchant is offering, unless you’re quite certain your score can stand the “hit”. Each time you apply for credit, it’s registered as a new inquiry; too many inquiries also can lower your score. If you’re shopping for a mortgage or a car, however, multiple pulls on your credit from similar lenders in a 30 day period only count as one inquiry.
Paying off your credit card in full each month can also be good and bad. You’d think that would be considered a good thing - and most of my clients who do so have impeccable credit. But for some borrowers it can be a mistake: Once again, creditors are often concerned with a borrower’s payment discipline; can and will they make regular payments each month, and on time?
Especially in this more credit-conservative environment, it’s important to maintain a clean record. While it may be tempting to ”forget” a payment for a month or to ignore a collection notice, you’ll end up paying for it in the end, and then some.
If you’re thinking about taking advantage of the current housing market by buying a home or refinancing an existing one, but wonder if your credit score will enable you to do so and snag the lowest possible rate, there is a forthcoming free service that you may want to take advantage of.
The resulting terms of a recent class-action lawsuit will allow up to nine months of daily monitoring of one’s credit file as well as unrestricted access to your credit report and your credit score. To qualify for eligibility, you must have had some sort of credit account open between January 1, 1987 and May 28, 2008. This can include any credit card, auto or student loans, and mortgages. The deadline to file is September 24, 2008.
To register, simply log onto www.listclassaction.com or call the toll-free number, 866-416-3470.
The information that you’ll have access to is limited to what’s kept on file with TransUnion, the defendant in the class action. The litigation against TU dates back to 1998, when plaintiffs accused the company of selling personal information to marketers in violation of federal law. The other two credit repositories - Equifax and Experian - are not affected by this action and thus the information kept by those companies is not included.
Nonetheless, this is still a good place for a potential new borrower to begin, especially is there is some reason to believe that there might be some negative or erroneous information contained in the report. By tackling the issues sooner rather than later, you can get yourself in position to possibly raise your score and qualify you for a more preferred interest rate.
It’s still important, however, to also know your credit scores from the other two repositories. Mortgage lenders will typically use a borrower’s middle score, and disregard the high and low scores on an applicant’s report. Thus, if your TransUnion score happens to be the highest score relative to the other two, it won’t count anyway, but it’s still useful information to have on hand. And obtaining it is free, so long as you meet the eligibility criteria mentioned above.
First Heritage Mortgage, LLC
6550 Rock Spring Drive, Suite 260, Bethesda, Maryland 20817-1131
Direct: 240.223.1730 • Toll-free: 866.833.LOAN • Fax: 240.223.1703
