Here is a scenario that happens all too frequently: A would-be home buyer applies online to obtain his all-important credit score. It comes back at a healthy 720, good enough to qualify for the best rate in the mortgage market. But then, when he applies for a loan with a local lender, his score is much lower. So low, in fact, that he might not qualify, even at less favorable terms.
What gives? How can your credit score be one number on one day and a different figure the next? And why does your score vary from one company to another?
A lot of things could be at play here. Let's start with the basics.
A credit score is a three-digit number that is considered an accurate predictor of whether you will make your house payments on time every month. The higher the number, the safer the bet that you will repay.
But your score is based on the information contained in your credit record. And because what's in your file is fluid, so is your score.
"Credit is dynamic information," says Greg Holmes, national director of sales and marketing at Credit Plus, a Salisbury, Md., company that serves the mortgage business. "It's constantly changing. It's up and down and constantly moving."
Your record changes every time the company that has your car loan reports an on-time payment — or more important, a missed payment that's now more than 30 days late. It changes each time your credit card balance changes. It changes every time you apply for new credit. And it changes when an old bankruptcy finally falls into the abyss, never to be reported again.
Because a credit record is a moving target, shifting on a daily or even hourly basis, your credit score is nothing more than a numerical snapshot of your file at the moment it is calculated. As such it can change from one moment to the next.
"It depends on how much information is coming and going in and out of that credit report," Holmes says. "It's whatever time of day and month you pull the report. There's even a difference between an account that's less than six months old and one that's older."
If you asked someone to pull your credit score today, exactly six months and 29 days after you closed a department store account, for example, the number would be different than if you asked tomorrow, when it has been seven months since the account was shut down. Maybe not by much, but perhaps enough to alter your chances to obtain financing.
But there's more to your score than what's in it. Another big factor is what's not in it. Not every creditor reports information to each of the three main credit repositories.
Say your auto lender is a local bank that reports only to Experian because Experian has a bigger presence in your state. In that case, neither TransUnion nor Equifax will know whether you are current on your car payments. They wouldn't know about your car loan at all. As a result, a credit score based on your Experian file will be different from one based on the records maintained by the other two big bureaus.
Also, each repository has its own credit-scoring formula. A Minneapolis analytics company known as FICO (formerly Fair, Isaac and Co.), from which the term "FICO score" comes, created all the formulas. But the algorithm used by each credit bureau is slightly different based on factors that each believes to be a more or less important component of risk.
So not only is TransUnion's score different from Equifax's and Experian's because it is based on information only in its records; it's also different because it uses a different analytical model. And even if each depository maintained the same files, their scores would be different because they use different formulas.
Next, it's important to know that the mortgage industry isn't the only business to use credit scoring to rate potential borrowers. Actually, housing finance came somewhat late to the technique. The insurance business has been grading potential customers for decades, and now auto lenders, finance companies, banks, employers and dozens of others use credit scoring to make decisions.
The key is that each business has its own scoring formula. And a score that may be acceptable to, say, the finance company offering to lend you $5,000 for a new roof probably won't be acceptable to a mortgage company trying to decide whether to lend you $500,000 to buy a new house.
So if you received your score from one of the Internet sites that provide a free score — but try to hook you into paying a monthly fee to monitor your credit file — it's a safe bet that the number, accurate or not, won't be worth much if you are in the market to buy a house.
If you're buying a house, you'll want an industry-specific mortgage score. No other score will do.
"Anybody can calculate a score," Holmes says. "Who accepts it is what really matters. Even the scores used in the mortgage industry wouldn't mean anything if Fannie Mae or Freddie Mac didn't accept them. Or if JPMorgan Chase or Wells Fargo or Bank of America didn't accept them."
You can obtain a free copy of your credit record from each of the three major credit bureaus at http://www.annualcreditreport.com. The law entitles you to one free report every 12 months from each repository, but there's nowhere I know of to obtain a free credit score.
Many outfits offer "free" credit scores, but in most cases, you have to sign up — for a monthly fee — for a credit-monitoring service. You usually can opt out of the service after a trial period. But the companies are hoping that you won't, or that you'll forget and won't pay much attention to your credit card bill when it arrives in the mail.
But remember, not every score is acceptable to mortgage lenders. I'm aware of only one online service that fits the bill: http://www.myfico.com. But even then, you'll have to sign up for the Score Watch monitoring service that FICO offers in conjunction with Equifax. You'll just have to remember to cancel the service before the free trial period runs out.
Beyond that, would-be home buyers can obtain meaningful credit scores by applying for a mortgage, either directly with a lender or with a broker who deals with several lenders. Once you apply, lenders are obligated by law to share the score they used as a basis to decide whether you qualify.
And once you obtain a satisfactory credit score, make sure that you don't do anything credit-wise that will change it, at least not until after the loan closes. Remember, a credit score is a moving target, so if you run out and buy new furniture using credit, your score will suffer, and you may no longer qualify for a mortgage to buy your house.
Distributed by United Feature Syndicate.