Why do credit scores vary?

There is a lot of confusion about credit scores for consumers and the professionals that use them to evaluate risk. One way many get confused is that there are multiple credit scores instead of just one. These scores are sold online and for most individuals there is little understanding about the difference between them. First there is the FICO score which ranges from a 300-850. The FICO score is the most popular score used by bankers to evaluate an applicant’s mortgage risk. This score is sold online to consumers at www.myfico.com. The FICO site offers three scores with each one representing the different bureau information from Experian, Trans Union, and Equifax. Bankers take the middle number of the three FICO scores as the base for evaluating risk. Most banks use the FICO score when evaluating a consumer’s credit risk for a mortgage loan.

There are some banks that use a different variation or model of the FICO score which do not tabulate exactly the same as the scores sold to consumers on the myfico site. This is why sometimes a banker will pull an applicant’s credit score and it can vary from the FICO score pulled online by the consumer. FICO is a company that creates many scores used for varied purposes. Besides FICO scores there are many other credit scores consumers may wind up purchasing online without realizing they are quite different from the score their banker might use to approve their loan.

Here are some of the other scores sold online to consumers:

-National Equivalency Score: sold by Experian and the range is from 360-840
-Vantage 2.0 Score: created by all three credit bureaus and ranges from a 501-990 with letter grades A-F
-Vantage 3.0 Score: newer version which ranges from a 300-850 like the FICO score. Although it is the same range it is not the same as a FICO score.
-Plus score: sold by the bureaus, it ranges from 330-830 and is strictly an educational score.
-Equifax scores: sold and created by Equifax and ranges from a 280-850. It is sold for educational purposes.
-Trans Union scores: range from 300-850 and are also sold for educational purposes.

Why are there so many credit scores available to purchase? There is a lot of money to be made in the credit scoring game. Consumers have been score-obsessed since the economy crashed and restrictions have become tighter with lenders, creditors, vendors, and more. Consumers are very interested in viewing, protecting, and understanding their credit. My next post will be about ordering credit and timing. It will explain why a score can change within an hour.

Discrepancy in Fico Score Pulled by Banks vs. the MYFICO Site Scores

Fico scores are the scores that most bankers use when assessing the risk of a potential loan applicant. When a banker pulls credit scores they usually get a merged credit report showing all three credit bureaus (Experian, Trans Union, and Equifax), as well as three Fico scores, each one representing the risk of the consumer related to information on each bureau. Most bankers use the middle score number as the basis for calculating the price of the loan.

What is unknown in most cases is Fico scores come in many variations. There are actually 53 different Fico scores. Since the myFICO site has recently settled a 4 year rift with Experian allowing consumers to buy all three Fico scores, we are getting many complaints that the scores pulled by bankers are sometimes different. Because there are many versions of Fico scores a lender may have an older or newer version of the Fico score which could cause a difference in the score pulled at the consumer site. The newer version of the Fico score is the 08 version as opposed to the 04 and 98 versions.

Besides the different models, there are also varied brand names of the model used by each of the credit reporting agencies. For example, the 08 version is called Fico Risk Score Classic 08 for Trans Union, Beacon 09 for Equifax, and Experian calls it Experian/Fico Risk Model v08. These brand names are listed on the merged report pulled by the banker. There are many reasons why banks might use different models or generations of the Fico score. Some don’t want to spend money on implementing the new version and others may still be evaluating whether they will approve it.

In addition to the different versions of scores causing variations, discrepancies in scores can occur if information changes on credit in between the first pull by the consumer at the Fico site and when the banker pulls credit. For example, if a credit card balance was updated on credit hours after an individual pulled reports and scores from the Fico site, there could be quite a difference when the bankers merged report is generated later on with the update. When the banker gets the tri-merged credit report and score from the pulling service the scores could vary 10-100 points depending on what balance to limit ratio the individual had prior to the update. The same goes for closing an account or new accounts being updated to credit. Changes of information on credit can cause drastic or small score differences. Although the Fico site is not guaranteed to be the same, it is a good indication of where the scores are.

Contact us with any questions or feedback on credit challenged clients or credit in general! www.northshoreadvisory.com

Making sure credit is analyzed with future financial goals in mind is a MUST before taking an action that can foil those plans and limit a consumers options for a better quality financial life.

You can now buy your Experian Fico scores at www.myfico.com.

For years consumers were only able to buy Trans Union and Equifax Fico scores. Now Experian Fico scores are also available to purchase at the Fico site. This is great news since mortgage banks usually take the middle of the three Fico scores (each score represents the info on Experian, Trans Union, and Equifax). It is easier to tell what that score is by seeing all three bureau Fico scores. Having the ability to view the scores closest to those the bankers use is a great victory for consumers!

Here is an example of how a collection account for a small medical bill can devastate credit and what the scores will look like after it is posted.

If a doctor bill is unpaid for a long period of time it may be sold to a small collection agency that purchased the debt for a reduced price. The collection agency is hoping to collect a profit by motivating the debtor to pay more than the purchase price of the debt. The collection agency will post this delinquency on a consumers credit as a way to motivate the individual to pay. Since the collection agency will have to pay the credit bureaus a fee to post this account on credit they usually just post it on two of the three credit bureaus. This saves them the expense of updating the third bureau while still causing damage to the middle score. What the lender might see on a merged pulling service credit profile would be Experian Fico score 780, Trans Union Fico score 680, and Equifax Fico score 675. The middle score would be a 680. Although the collection agency did not update all three bureaus the affect to credit is still devastating. If this loan applicant was getting a large size mortgage (jumbo loan) they may be rejected due to the score being below a 740. If a consumer has a collection account on credit they should call us to discuss it before rushing to act.

Last night on 60 minutes it was confirmed that there are mass amounts of errors found on consumer credit. Not only do these errors reflect misinformation but many of them have cost consumers dearly in interest payments and for others they have been denied financing. Poor credit can cost consumers enormously, not in just dollars, but also a better quality of life. Consumers should be checking and monitoring credit consistently to protect and maintain the best credit scores. See the attached link for our ECS monitoring product.


Understanding the Vast Business of Scoring

Scoring thresholds for approvals and better rate offers on loans have become higher while lenders of all kinds depend on scores to evaluate and curb risk making it essential for all of us to understand who creates these scores, where they are offered, and what the variations are.

It is always important to note that there are many scores and each may have a different range. For example, if you pull a Fico score the range is 300-850 and anything above a 740 is excellent. If you pull a Vantage score the range is 501-990 and it has letter grades A-F. If your Vantage Score is a 740 it does not mean you have excellent credit.

Most consumers think all scores come from the bureaus which is also false. Fico created the first scores for lenders to evaluate risk. When banks found themselves getting sued for discrimination due to underwriters (bank employees) being the sole authority for rejecting applicants, the demand for a score to use as an indicator of risk became prevalent. This was a way for the focus to come off the banks when consumers were rejected. Fico is and always has been a separate company from Experian, Trans Union, and Equifax. The Fico scores used by lenders are scores created by Fico for the purpose of each bureau to sell to lenders. The bureaus use their Fico version score formula for lenders to evaluate the information the bureau compiled on a specific consumer in the form of a number. The lenders pay a fee to the bureau for this service. Equifax and the other bureaus pay Fico a royalty when using the Fico formula created for them. Equifax, Experian, and Trans Union did not create any Fico scores.

There are many models of the Fico Scores made specifically for Experian, Trans Union, and Equifax and each bureau has separate names for their versions:

Equifax has Beacon 09, 05, & 96 or you might see these same versions displayed on the report as Beacon 5.0 and 9.0 as well. There is also Pinnacle 1.0 & 2.0 which is Equifax Fico next generation.

Trans Union Fico scores are called Fico Risk Score Classic 08, 98, or 04. There is also Fico risk score Next Gen. The old name of the Trans Union Fico score was Empirica.

Experian has the Fico Risk Model 08, V2, V3 and Fico Advanced Risk Score 1.0 & 2.0. Experian use to call its score Fair Isaac Risk Score.

Although some of these scores are outdated they may still be used by banks. You can find the name of the model used to the left, right, or above of the score itself on a merged credit report.

Besides Fico scores, there are hundreds of other scores created by each bureau and sold for many purposes to lenders, insurance companies, credit card companies, landlords, finance companies, telecommunication companies, and much more. There are scores that decipher which consumers might be more likely to default on a mortgage already extended, scores that give insight into which consumers should be offered lower interest plus higher limit credit cards. Some scores even predict those who are more likely to go into strategic default on a mortgage loan. There are even global scores used by large corporations doing business internationally.

Just to give you a glimpse into varied scores here is a list of just a small portion of scores that one of the bureaus offers for sale:

In the Market Models
Income Insight
National Risk Model-National Equivalency Score
Decision Insight
Credit Migration Solutions
Collect Score
Auto Risk Model
Bankruptcy Watch
Retail Risk Score

These are 10 of 100’s of scores offered by bureaus to corporations as a tool to help identify consumers and existing customers that will bring more profits as well as those that will deliver potential loss.

When we think of credit scores we think of consumer scores used to evaluate risk for mortgages and those that we as consumers buy online. But understanding the vast business of scoring can help us with the big picture. Since we are all being evaluated and watched through these algorithms it helps to get a clearer view of how they work within the corporations that use them.

Find out more information on my website www.northshoreadvisory.com.

ABC’s of ID Theft

Recently a client came to us with questions about ID theft and a very unusual situation that he experienced. Since most people would not expect this to occur I thought it is a great example to share. This was his question to us:

About six months ago I wound up having to stay in a hospital for minor surgery. Everything went well and there were no issues with my physical health, however, my credit health took a dip. I recently learned the hospital had an employee that stole and sold patients personal information including, social security numbers, addresses, etc. Last week, I found out that someone had opened three cell phone accounts in my name and took out insurance on the phones as well. What should I do to protect myself?

Identity theft is one of the most popular crimes that consumers fall victim to. The first step is to contact the cell phone company and make sure they know this is fraud. Ask them to guide you through the steps to be taken. They will also give you a fraud package or form which you will fill out and send back to them. Make sure to keep a copy in a file for yourself, jot down the names and ID numbers of all you speak to (noting what was said), and get something in writing from the creditor confirming acknowledgment of the fraud. You must also make a police
report and keep a copy with your records.

You should also order your credit reports from www.annualcreditreport.com. You are entitled to a free copy annually from each of the three major credit bureaus: Experian, Trans Union, and Equifax. By ordering these reports you will not hurt your credit score at all. When you receive the reports look through them carefully taking note of any accounts you do not recognize. At the end of the reports there will usually be a section showing “inquiries viewed by others” and “inquiries viewed by you”. The first type is the one of concern. It is a list of creditors who have pulled your credit and may have approved the opening of accounts in your name. If you see any accounts or inquiries that you do not recognize call the creditor for further investigation. It is also a good idea to call all your creditors and alert them as to what has occurred. This allows them to watch for suspicious activity and protects you from liability if the thieves have more information than you realize. There is no need to close accounts if there has not been theft activity.

You must place a Fraud Alert on your credit. Fraud Alerts are a way to let creditors know precaution must be taken before allowing the opening of credit in your name. A note will be listed on your credit profile alerting all creditors to contact you directly before approving credit. Once you place a fraud alert with one credit bureau the others will be notified automatically.

In many cases when a creditor or hospital has a breach of security like this they offer a free credit monitoring product to consumers at risk. This allows them to watch their credit daily. Most of these monitoring products offer access to fraud alert protection as well. Take the monitoring product if offered and it will guide you through listing a fraud alert on your credit. If a monitoring product is not offered you can go to any of the 3 bureaus listed below and fill out a fraud alert form directly. There are two types of fraud alerts: 90 day and 7 year extended. It is best to take the extended one for extra protection if you can. All of the bureaus offer credit monitoring products for purchase as well. If you did not get a free credit monitoring offer it is a good idea to buy your own monitoring product. This will give you continued security and credit management in case other items pop up that have not yet been reported. If you live in NY and ID theft insurance is offered with these products make sure to read the fine print since most exclude NY residence from coverage.

1. Experian: 1-888-525-6285, www.experian.com to add an alert and view your report immediately.

2. Equifax: 1-800-525-6285, www.equifax.com

3. TransUnion: 1-800-680-7289, www.transunion.com

For more information and details about ID theft and protection visit: http://www.ftc.gov/bcp/edu/microsites/idtheft/.

Also filing a complaint with the FTC may help to catch criminals nationwide: https://www.ftccomplaintassistant.gov/.

Credit Question

Q: I ordered all three of my credit reports from Experian, Trans Union, and Equifax and I paid to buy my scores as well. Please tell me why two of the three scores might be so different from the third? Experian was a 740, Trans Union a 620, and Equifax was a 625?

A: Without seeing your credit report, it is hard for me to say exactly what is causing this large difference in scores, but I can make a very good guess. Collection agencies represent lenders, creditors, and service providers that have not been paid, and are hired to collect bad debts that consumers owe to the original creditor. Sometimes, these smaller agencies try to save costs by reporting to only two of the three credit bureaus. By reporting to even a few bureaus, they are able to damage a consumer’s credit enough, while saving money. As a consumer, as long as your middle score is low, it will affect your ability to get financing and credit approvals. Your best bet is to send me a copy of your credit report tracy@northshoreadvisory.com so I can give you a definitive answer.

If anyone has any credit questions leave me a message or send me an email at ask@northshoreadvisory.com.