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Paul Yamilkoski

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Avoiding A Trap In Credit Scores

“ How the heck could my credit scores be off by that much, in just one month, when nothing has changed?“

That is the question that I was being asked by a gentleman who had just had a lender pull his credit for a mortgage. It only took few questions to realize that the difference was caused by the difference in the sources of the scores he was comparing.

I have touched on this subject before, but it is worth touching on again.

There are a bunch of credit scores out there that tell a story about each of us to potential lenders and others. There are scores used for renting an apartment, scores for buying an automobile, and,  of course, we know about the scores for getting a mortgage, just to name a few.

Keep in mind that credit scores are intended to determine, mathematically, the level of risk involved in lending money to a person, based upon current and past behavior, and the chance of of that defaulting on the loan. High scores indicate lower risk and low scores not so much.

All of these scores, that professionals pull, have an applied purpose. These scores are tools for making a specific business decision. Outside of the arena they are designed for, they are essentially useless. There are some that might want to argue that a bit, but put into context, there is little to debate. A score is not useful if it can not be used for an intended purpose. So, though the score we get when our credit is pulled for an auto loan is very useful for qualifying for the auto loan, it can be relatively meaningless for trying to qualify for a mortgage.

This happens because the scoring algorithms used for each purpose are different. For example, the scoring for an auto loan will weigh more heavily your past history with an auto loan. That same credit information is looked at differently when applying to rent an apartment, which looks at history relating to rental history more heavily. The same is true when you are applying for a mortgage.

There are also some scoring models designed to include individuals with less conventional credit history, who would otherwise not have a score. These will take into account reported rental history etc that are not reported to the standard system. There are a few such scoring models being used right now in the mortgage environment.

The trap in credit scoring is the “consumer” scores, sometimes referred to as “Fako” scores (as in fake scores), that are offered to the public, are not useful for any of those purposes.

Unbeknownst to the common man or woman looking at these scores, you are paying for a score that compares you to other people, but can be and often is vastly different than the scores used to qualify you for a mortgage or auto loan, for example. It is not uncommon for these “consumer” scores to be as much as 100 points different than the FICO scores that their loan officer might pull for a mortgage.

Now you are probably asking your self why anyone would pay for those scores. I ask myself that same question all the time. The only time I have ever known anyone to be even a little bit interested in their credit scores, is in the context of lend being able to get a loan or credit card etc.

There are a few rare people that watch scores closely because scores affect insurance rates and so on, but most people are not nearly that attentive. Heck, I’m a credit expert and help people with their credit for a living, and I don’t focus on my own credit that intently. I take care of following a basic plan and, other than a periodic check to make sure nothing has gone wrong, my credit is pretty much on auto pilot.

So why do those other scores exist, if they can’t be used for any real purpose such as lending? And why do people pay for something that has so little relevance and hence lacks any real value?

Well, I can tell you why they exist. There is an obvious need for people to know their scores, so they can get qualified for a loan. The challenge is that the algorithm that is used for mortgages, FICO, is very closely guarded and expensive for companies to obtain and use. So, if you don’t want to pay for the real thing, you make up your own and sell it.

It is all about making a buck.

Consumers, however, rarely understand that the scores are not relevant when considering lending. You have to really look and pay attention on those various sites to get any idea that they are not going to be helpful for lending.

I have worked with thousands of clients, and a high percentage of them were confused and frustrated by consumer scores, when they went to their loan officer to get a mortgage.

I have not taken the time to  evaluate all the services out there, and do not plan to do so. But I can tell you a few that we encounter on a regular basis that do not give you FICO scores for your money.

Credit Karma is one we hear of often. I have not had a single client that used that service that received FICO scores. If you use them to monitor your credit, and are focussing on your scores, check to see what scores they provide and remember that the scores may be light years from where your FICO score your lender will pull are.

Another example lies with the credit bureaus. Most people would think that getting their credit scores directly from each bureau would be accurate for lending. But most of the time, the scores being offered by them are not FICO scores. What is interesting, is that you can get FICO scores from them in some cases. You just have to dig for the right product. I know that Experian offers one particular product called Credit Check Total that provides FICO scores.

What I hope to make clear here, is that all scores are not the same, even when being pulled for legitimate lending purposes. Don’t be surprised if the scores you got when buying a car are different from the ones pulled for a mortgage. More importantly, I want you to remember that the majority of scores you will get from monitoring services will not be worth anything, if you are looking because you are planning to get lending. Don’t waste your money.

I hope you found this helpful and I welcome comments and questions. Please also share the information with your friends and contacts. Odds are they will learn something and be thankful for it.

If you are facing credit challenges, or you have a client that you are going to have to turn away due to credit challenges, then I encourage you to give me a call. A reputable company like Heartland Credit Restoration can help you turn things around and get that credit loan ready.

There isn’t a better company you can go to for help, and the consultation is always free.

I will look forward to talking to you and until then I hope you have a wonderfully blessed day!

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