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Friday, January 11, 2013

Are Consumer Purchased Credit Scores Different from Financial Institution Credit Scores?



 “When consumers buy a credit score, they should be aware that a lender may be using a very different score in making a credit decision.” Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), said in an email statement.

The three main credit reporting agencies; Equifax, Experian & Transunion, use their own algorithms to calculate credit scores and they each have several ways to calculate it.  Fair Isaac Company also computes and sells credit scores, known as FICO Credit Score, has more than 50 scoring models.  This means that there are numerous variations of a credit score. The good news is, based on CFPB’s research found that most of the scores pulled by consumers and other organizations are consistent by at least 75%. Between 20% - 25% of the scores that consumers purchase were moderately different enough to move them into another credit grade that financial institutions use to determine what consumers may qualify for loan rates. The remaining 1% - 5% of the consumers’ scores was significantly different.

Note:  FICO offers a calculator that lists the range of interest rates offered based on FICO score.  This of course may differ based on the financial institutions rates offered.

What is not widely known is that there different types of scoring models that are based on the information the financial institution or business wants to analyze.  For example, a credit score for a credit report pulled by an auto dealership may differ from the credit score of a credit report that is pulled by a financial institution. This is because the auto dealer may mainly want to focus on a consumer’s payment history on auto loans, regardless of the financing company or financial institution.  However, the financial institution’s credit score may be based on a consumer’s entire payment history on all trades reporting on the credit report. Another familiar type of scoring model is the one used by Utility Companies.

Regardless the scoring model, the fact holds true that if you have good credit, you will have high or good credit scores on them all and if you have “colorful” or bad credit, you will have low or bad credit score on them all.  What important is that you understand the “Anatomy of the Credit Score.”
  • 35% is based on your payment history.
  • 30% is based on how much of your available credit you've borrowed against.
  • 15% is based on the length of your credit history.
  • 10% is based on the diversity of credit you carry.
  • 10% is based on the number of “hard inquiries” from creditors to qualify you for credit or open an account.
Other types of scoring modes are Bankruptcy Scores and Fraud Shield Scores.  

A Bankruptcy Score determines the likely hood of a consumer to file for bankruptcy.  Many lenders use it to determine whether or not they will loan you money. A bankruptcy score also may influence the interest rate that you may qualify for on a loan. Bankruptcy Scores are not generally shared with the public.  The lower the Bankruptcy Score the better. A Bankruptcy Score of 1 – 100 is ideal. A score of 300 to 900 indicates that you need to improve your credit by paying down debt especially on revolving lines of credit, like credit cards.

A Fraud Shield Score identifies inconsistencies between application information and credit report data. Just as the credit score, the higher the score the better.  If you have low Fraud Score, the lending institution many request or require additional document to verify your identity.  Don’t give them a hard time though, it is for your protection.

As with anything, financial and credit knowledge is Key to your Prosperity. 

STEP 1: Understand where you are with your credit.
  • Pull your credit report to see what is reporting.  You are able to get a least one free copy of your credit report from all credit bureaus. Go to AnnualCreditreport.com.
  • If there are several past due payments or lots of collections reporting, you may want to save your money and work on restoring your credit.  Try the myFICO.com Credit Score Calculator to start. 
  • If all accounts are paid as agreed with no collections reporting, you may want to invest in purchasing your credit score to see where you are. 
Start at FreeCreditScore.com.  The score may be free, but make sure you read the disclosures to ensure that you are not required to sign up for a monthly monitoring service.

STEP 2:  Ask for help.

Regardless of whether you need assistance with restoring your credit or improving your credit to increase your credit score, don’t be afraid to ask for assistance.  Below are a few great options to assist you.

Anngie Jenkins, Credit Score Queen

National Credit Educational Services

STEP 3: Assess your spending habits, budget and savings plan.

This is crucial with rebuilding or maintaining your credit.  Feel free to contact me for assistance through
   
Tarra Jackson, Financial Coach
Prosperity Now Financial Management Services
(404) 852-6295
  
We are all looking forward to being a resource to you towards your Prosperity Now!