Doing what I do for a living, you can bet I am an advocate of credit score awareness. It’s important — no make that imperative — to know your credit score, how it’s derived and that it is to be protected and nurtured.
That’s not the norm for many first-time homebuyers. It’s for these credit newbies that I’ve put together the following Credit Score Q & A.
1. What is a credit score?
A credit score is a number that represents a person’s relative creditworthiness. Typically a three-digit number from 300-850, it is the product of a mathematical model that evaluates an individual’s credit report information and, based on the analysis of millions of credit transactions used to build the model, produces the score. A higher score correlates to a higher probability of the consumer paying their loans on time.
2. How are credit scores used?
Some landlords use credit scores when vetting prospective tenants. Property and casualty companies use them in underwriting insurance applicants. Mortgage lenders, insurers and investors use them to determine whether, and typically at what price, they are willing to make, insure or purchase mortgage loans.
3. Is there more than one credit score?
Yes. Three companies serve as the main repositories of borrower credit data, and there are several credit score vendors that use that data. On top of that, there are many companies who sell reports containing credit data and scores, sourced from those repositories and score vendors. Each credit score vendor has a different approach, and some have several models designed for a particular purpose, such as auto lending or mortgage lending. In addition, there are multiple versions of scores available as credit score providers work to improve the predictive power of their scores. In the case of mortgage lending, each borrower’s credit report comes with three credit scores, one from each of the three repositories.
4. Is one score better than another?
It depends on what you are trying to accomplish. If your goal is to use the score with the greatest predictive power for a particular type of lending or financial forecasting, you may choose a score different from the one you would use in the origination of a mortgage loan. In the case of mortgage lending, most lenders use the same version from the same credit score provider largely because it has been the de facto standard for many years. That is not to say that some mortgage lenders aren’t using other versions of that score or scores from other providers.
5. Why does a score that a consumer obtains for monitoring purposes often differ from the score a lender obtains during underwriting?
There are several reasons this can occur. First, credit report information is dynamic. Creditors regular submit updated information to credit repositories. Because credit scores are derived from the dynamic data in the credit repositories, credit scores can change regularly. Second, there are multiple credit score providers, each with different scoring models. Third, each credit score provider has multiple versions of its score in the market at any given time. Finally, not all creditors report to credit repositories, and sometimes, those that do may not be reporting accurately or in a timely manner (although that has improved significantly over the years).
6. What’s the best advice for real estate agents and consumers?
Real estate agents and consumers should go to the various credit repository websites and credit score providers. These websites contain a wealth of information that will help consumers understand as much as possible about credit scores and credit scoring, including how to increase one’s score. Consumers should also be encouraged to request a copy of their credit report at least annually (generally at no cost to the consumer) to ensure that the information it contains is correct. Finally, when consumers are serious about house shopping, encourage them to get pre-qualified and discuss their credit report with their lender. Every lender and mortgage insurer will pre-qualify borrowers. This can alleviate any uncertainty upfront by enabling consumers to shop with confidence for a home they can afford.
For additional information about credit, share our homebuyer education site with your customers.
Check out our mortgage infographic about credit scores!