When is Your Credit Score not Your Credit Score?

Who has monitored their credit on sites like Credit Karma, only to apply for a loan and have the score vary so wildly that you couldn't get financing?  In my time as a mortgage originator, I lost count of how often applicants would say, "But I just checked my score and it was way higher than that!"

My usual response would be that sites like Credit Karma are sort of like Zillow for your credit profile.  The information is a good estimate of what your score and profile are, but lenders don't use that exact formula.  Realtors use a similar line on some disclosures by saying the "information is deemed reliable but not guaranteed."  That was true enough of an explanation when I was on the corporate side of the desk, but I recently applied for my own financing and found out just how hard it can be to navigate what my credit score really is.  I felt like Alice in "Through the Looking Glass," I knew what my credit score was this morning, but it changed a few times since then.

This post will break down what that meant and what happened.  In that order.  Have you ever looked for a recipe online and seen a long soliloquy before the list of ingredients?  "It all started when I took a year off from college to backpack through Italy.  I met a Tuscan grandmother who told me that the secret to a good marinara was patience..."  And here you are thinking, "Damnit, I'm in the checkout aisle at Costco right now and I'm just wondering how to add some zest to the rigatoni.  I don't need to read 'Eat, Pray, Love' first.  Or if I'm being entirely honest here, again."

So I'm switching things up and doing the useful part first and then the story for anyone who's still reading.



The Useful Part

There are three credit bureaus, Experian, Trans Union, and Equifax.  You can get your credit report for free from each of these bureaus once a year, and you can have credit counseling agencies pull and review credit without that counting as an inquiry.  The annual free reports may not have your score.  Credit counseling agencies have, in my experience, been very accurate when it comes to their credit scores lining up with what a mortgage lender sees.  Or you can monitor your score and profile on your own.

There are a wide variety of ways to do that, some free, some with a monthly expense, and some as an added service for another product.  Each of the bureaus can tell you different degrees of information and will allow you to play around with their scoring models, but you may have to pay for those.  More and more credit cards offer some kind of monitoring as part of their service.  Credit Karma is the leading website and app, although you can try a host of others, like Lifelock, IdentitySource, or Vladimir Zuckerberg's Totally not Mining Your Personal Data Service.  On second thought, let's stick with the major bureaus and Credit Karma.

So the real question is, why does Credit Karma or my Discover card tell me I have a 700 score and then my mortgage company says they have a 640?  How can that be, and what can I do about it?

One of the bureaus, Experian, calls their score a FICO score.  And the wonderful part about a FICO score is that there are at least three of them.  One that credit card companies tend to use, one for auto loans, and a third for mortgages.  Typically the credit card FICO score is the highest of these three, then auto loans, then mortgage loans.  The factors that are used to calculate the score are basically the same - do you pay your bills on time, are you over-extended on credit cards, are there major financial problems in the recent past, etc.  But the weight or importance of these factors can be different for each scenario.

It took a customer service rep a few minutes to walk me through where to find this on the Experian site that I paid to access.

For example, of course recent collections harm your score for all three FICO's.  But in the eyes of a credit card company, they may only care if the collection is paid, and the question of how recently it was filed matters less.  A mortgage company may determine that a recent collection - regardless of paid or unpaid status - indicates a higher risk of default on a home loan than a credit card.  So it takes longer for your (mortgage) score to recover from that.

Your credit card service that monitors your score may just be using THEIR scoring model, which although it's directly from the bureaus, could be a drastically different score than what your mortgage lender will see, even though the underlying information is exactly the same.  Credit Karma shows your Trans Union and Equifax scores under the Vantage scoring model.  Which is a commonly-used system that your prospective credit card company, auto loan, or mortgage lender may or may not use.

Lenders, insurance companies, landlords, employers, and other services that evaluate your risk level to them may go to all or any of the credit bureaus and give them their individual criteria and ask for that to be used as a score.  Here is what Credit Karma said to me about that.  (emphasis mine)

On your Credit Karma account, you will see the VantageScore 3.0 scoring model, provided individually by TransUnion and Equifax.  VantageScore 3.0 incorporates a broader set of credit-related data and can score up to 30 million more people than other models.  With so many different scoring models out there, you never know which score a bank will use, but VantageScore 3.0 is a strong predictor for what the banks may see.  Credit bureaus use many different scoring models, even within the same credit bureau.  Each bureau can use dozens of different credit score models based on the requirements of different lenders. 

Dozens!  For each bureau!  And there are three!  So far!  When Tyler Durden blew up just one credit bureau at the end of "Fight Club," you see how futile that gesture really was.

My Story

I went through a divorce and lost my house during the housing crisis.  That left me with a shattered credit report and literally tens of thousands of dollars in bad debt that I cleared up without having to declare bankruptcy.  Before hitting bottom and after recovering, I worked in financial services.  So monitoring my credit is something I do regularly but often with stressful flashbacks to how bad it used to be.  I've seen my score get about as low as the system allows, and it's been pretty damned good too.

Then recently I did two stupid things.  I got mad at Sprint, switched to Verizon, and decided I wasn't going to give them another red cent, credit impact be damned.  After all, I own a home free and clear, I don't need new credit card debt, and I despise taking out a car loan (plus I work less than a mile from my house so I could get by without a vehicle if it comes to that).  Go ahead and put that last bill on my credit report as a collection, you nasty corporate behemoth!  See if I care!  So they did.  And then I decided that maybe I want to fix up my house faster than my monthly savings would allow.  Time to look at mortgage lines of credit.

Lesson number one: Don't do what I did if you have the money to pay that bill.  It harms you more than it harms the company.  There is no "Comcast sucks" algorithm that lenders use, even though they totally should.

And then because the house I bought had no appliances, I took out a store credit loan to get myself a fridge, washer, and dryer.  It's one of those "interest free but if you don't pay it off right away then you get immediately charged for all the interest" deals.  I thought of it as an installment loan because am I really going back there to buy more appliances?  Probably not.  But it was actually a line of credit and since I was paying for other rehab costs and wanted a cushion in my savings for that, I just made the minimums each month.  After a while, the full interest was tacked on.  Which put me over the credit limit I didn't think I had.

Being over a credit limit is the worst non-derogatory item that impacts your credit score.  Lenders think, justifiably so, that going over the limit shows that you can't manage money without borrowing, and that you're a risk to keep on borrowing until you eventually default on something.  Lesson number two: these deals are lines of credit and you should get the balance down at least to 50-60% of the credit limit right away even if you're just going to make minimum payments for a while after that.

I thought my credit score was in the low 700's.  But I applied for a mortgage loan with a place that only uses Experian.  I was floored to find out that score was all the way down to 617, still high enough to get some kind of credit, but not what I was really looking for and certainly not at the rates a 700+ score would get me.  Well, I dug out of way worse situations, so time to roll up my sleeves, get over my damn fool self, and pay off or down some accounts.

Credit Karma only monitored two of the three bureaus, and the one I thought I needed was a separate monthly expense.  Paying Experian meant I could play around with score simulators too.  The collection was zeroed out and the line of credit was paid down to about 60% of the limit.  I could get it down to zero if it that would make a difference in my rate, but tried a smaller reduction first.  Once the reporting caught up with my payments, I had Experian at 672, and the two Credit Karma Vantage scores at 688 and 687.  Not quite at the 700-720 range I was looking for, but worth seeing what kinds of financing I could get.

Back to the original lender I go, and my score jumped all the way up to (drum roll please)...629.  And that's when I found out the important stuff about how there's virtually no limit to the ways you can get a score.  The inner depths of Experian's site did give me the score matching my lender's exact point calculation.  That lender was only using one bureau though, and I now had no clue what my other two scores were.  Sure, Credit Karma had them in the high 680's, but they just told me there are dozens of ways to calculate those scores.

I stopped in at another credit union and decided to rip the band-aid off and have them pull their report.  All's well that ends well however, as a different lender used a different bureau and as far as they were concerned my qualifying score was 705.

To recap:  I did something stupid that dropped my credit scores.  I fixed that stupid thing.  I monitored my score directly with one of the credit bureaus only to find out the creditor's score from the same bureau was over forty points lower than I had been led to believe.  And then Credit Karma, which in my experience is usually overly optimistic compared to what mortgage lenders see, had me pegged at a score eighteen points lower.  As Alice would say after descending down the rabbit hole, "Curioser and curioser."

What can you learn from all of this?

1. The fundamentals of a good credit profile are the same regardless of scoring models.  Pay your bills on time, avoid late payments, collections, charge-offs, public records, and major derogatory events like foreclosures whenever possible.  Know that however bad things get, good financial behavior and time will eventually make things better.
2. Understand the terms of your financing and for all revolving/credit card accounts keep your balance as low as possible in relation to the credit limit.
3. Monitor your credit on a regular basis, through the annual free report, through legitimate paid or free sites, and/or with credit counseling agencies.  If possible, check with a prospective lender about their bureaus and/or scoring models prior to an inquiry, and then try to match the score you see with the score they will see.
4. At some point you'll just have to apply with a lender, see what your score is, and then work with them on any necessary fixes.

Once I was able to find the different FICO scores, the paid service through Experian did show me an exact match to my lender's score.  I've never seen an exact match through any other service, paid or free, except for counseling agencies.  So if you really need to know before a lender sees your report, I'd say your best options are to pay the bureaus directly or go to a counselor - which may require payment for the merged credit report but shouldn't have much in the way of other fees.