Mortgage Memo: Credit

A person doesn’t have “ONE” credit score.  A person’s credit history can generate a number of different scores depending on the scoring model used.  The original and main model used by creditors comes from the Fair Isaac Corporation (FICO). The three main credit bureaus are separate from FICO.  FICO models have been developed for auto, credit cards, insurance, mortgage, etc.  In 1995 Fannie/Freddie began using the FICO scoring model.   Here is a quick history of the FICO model’s implementation by the three credit bureaus (TransUnion, Experian and Equifax).

The three listing is RED are what the mortgage industry uses.  As you can see one model is from 1998 and two are from 2004.  Auto, credit cards, insurance etc are welcome to use the other models but mortgage (per Fannie/Freddie) are using some pretty old models.  A person’s “FICO” score at the car dealer could be different than the “FICO” score I run in mortgage.

To create some more confusion the three bureaus created their own model and called it VantageScore.  This is what Credit Karma uses and what credit cards are giving away for free on their websites.  In the early days of VantageScore the scores were very different from the mortgage scores.  VantageScore has changed and they are now closer but still generally 20+ points higher.  That’s not a scientific number just anecdotally what I’ve seen over the past year or so. 

Where does that leave you and me when we talking to our prospects about credit score?  I would say Credit Karma is like a bad set of scales.  It may not tell you exactly what you weigh but it will tell you if you’re losing or gaining. 

Here are the key things to tell people about credit:

1. You can’t fix a late pay or collection by paying it.  Once it’s on the report the damage is done.

2. A late pay is 30 days past due.  That’s the #1 score damaging item.
   
3. When a collection agency receives an account (medical, cable, cellular) they give you 30 days to pay or make arrangements. You should definitely do this.  Setting up arrangements will stop them from reporting to the bureaus.
4. The easiest way to improve a credit score is to pay down any revolving balances (credit cards).  Pay them down to 5% or so of the credit limit and keep making some use of them.  And don’t close them. Also, by law everyone can see one credit report a year from each bureau for free.   They won’t score it but you will see the actual accounts and the payment history.   The website is www.annualcreditreport.com