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Lesson 2.3

How Credit Scores Are Determined


Credit Score Factors

The FICO credit score condenses your entire history as a borrower into a tidy three-digit number. That number ranges from 300-850 and is tabulated separately by each of the three credit reporting agencies.

FICO doesn’t reveal exactly how it formulates a credit score. But the company does provide a more broad-based look at how it all comes together.

So, let’s take a look at the five big factors that make up your FICO score:

  • Payment history (35% of your score): Your payment history accounts for the single largest portion of your score. Your track record as a borrower tells a potential lender a lot about the way you handle credit. The payment history portion considers the number of timely payments, late payments and number of adverse credit items, including bankruptcy, judgments, liens, past due accounts and items in collection.
  • Amounts owed (30% of your score): Having some debt isn’t necessarily a bad thing. But having too much in relation to your available credit can drag down your score. There are different rules of thumb, but generally try to keep your amounts owed to about 30 percent or less of your total available credit. Think of it as a balance-to-limit ratio on your credit cards.
  • Length of credit history (15% of your score): The next largest slice of your score is devoted to the length of your credit history. In general, a longer credit track record will usually bump up your score. FICO scores consider the age of your oldest and new credit accounts, the average age of your accounts and how frequently some accounts are used.
  • Types of credit used (10% of your score): The FICO score looks at the different types of credit you use, from credit cards and retail accounts to installment loans and mortgages. Opening new credit accounts for the sake of diversity isn’t likely to help your score. FICO says your credit mix isn’t usually a key factor, but it can become important if you don’t have much in the way of a credit history.
  • New credit (10% of your score): The FICO score looks at your number of new accounts and the type, as well as the frequency with which they were opened. A flurry of new loans or credit inquiries could signal a desperate grab for credit, so be cautious when opening new accounts. Applying for new credit may not hurt your score, and if it does, it’s typically a small impact. FICO also allows for rate shopping within a 45-day window, meaning your credit score won’t plummet if you’re seeking loan preapproval from multiple mortgage lenders. The credit bureaus will treat all credit pulls within that time frame as just one big inquiry.

Mortgage Credit Scores

It's important to understand there isn’t just one type of FICO score. There are dozens and dozens of different scoring formulas depending on the type of financing you’re seeking.

A mortgage lender, a car dealer and a credit card company could pull your credit and each come up with three different versions of your credit score.

Mortgage credit scores often look different from other types of credit scores, including the "educational" or generic scores consumers can receive from monitoring services like Credit Karma and other tools and apps. The scores that mortgage lenders see are tailored for their financing niche.

That means what you see as your credit score and what lenders see can be two different things.

Mortgage lenders will request your credit score from each of the three major credit bureaus. If the scores are different, and they very often are, lenders will typically use the median, or middle, score as your official credit score.

Talk with a Veterans United loan specialist at 855-259-6455 to get a look at your mortgage credit scores and what might be possible.

What Credit Bureau Does Veterans United Use?

Like most mortgage lenders, Veterans United orders what’s known as a tri-merge credit report. This report shows your credit history and mortgage credit score from each of the three credit bureaus (Equifax, Experian and TransUnion).

We will use the median (middle) of the three scores as your credit score for loan qualification purposes. For example, if your Equifax score is 600, your Experian score is 620 and your TransUnions score is 625, we would use the 620 from Experian as your score.

Credit score minimums can vary by lender, loan type and other factors. The good news is VA loans often have lower credit score benchmarks than other loan types.

Why Does My Lender See a Different Credit Score?

Some consumers who see their credit score before seeking loan preapproval are confused and frustrated when a lender comes up with a different number.

It's important to understand that the educational score you get from FICO, Experian or another credit agency may not quite correlate to the more tailored credit score your lender sees. These specialized credit scores, which are weighted more toward mortgage-related factors, aren't typically something you can get a look at ahead of time.

The good news is that prospective borrowers with solid credit shouldn't have much if anything to worry about. But those in the bubble might have to put in a little more work in order to secure home loan financing.

Here are some other things that may be helpful to keep in mind:

Credit Scores Are Compiled in Different Ways

A credit score is a numerical representation of a consumer's assessed creditworthiness based on credit information. Credit information is compiled by credit reporting agencies or CRAs. These include TransUnion, Equifax, and Experian.

Many people believe that when they purchase a credit score from a credit monitoring service, they have access to the same information as a potential lender. Unfortunately, because CRAs don't share credit information, this is often not the case. Even companies who use the same credit scale may not come up with identical scores. This is because consumers and lenders have not only different models, but different formulas that emphasize specific aspects of a consumer's credit history.

Different Scoring Methods

You do not have a universal credit score. The number you receive depends on the scoring method being used and the type of loan or credit you are applying for. Here is a quick rundown of the most common methods:

  • FICO Score: The Fair Isaac Corp. score is the standard for many lenders.
  • VantageScore: Co-developed by TransUnion, Equifax, and Experian, this model combines data from all three CRAs.
  • Educational score: Each CRA also has its own proprietary scoring model. While not used by creditors, these scores are designed to help consumers manage debt, identify problems and minimize identity theft. Most credit monitoring services fall under this category.

The truth is that you could spend hundreds of dollars finding and documenting your credit score through each one of these services and still not come up with the same number as your lender.

So What Can You Do?

Despite the confusion surrounding credit scores, your objective should still be the same: Maintain a clean credit history.

Instead of using a credit monitoring service, you can obtain a free credit report every 12 months. Use this to develop a baseline of what to expect when speaking with a lender and to identify and correct any mistakes.

Finding and correcting inaccurate credit information is also imperative for making sure you receive the best credit score possible. Knowing you have a clean credit history can give you confidence when speaking with any lender, no matter the scoring model.