By Steve Tytler
Question: I recently went to one of those credit report websites advertised as free and paid for copies of our FICO (Fair Isaac Corp.) credit scores. The report said my score was 722 and my husband’s was 720, which are both considered to be excellent credit. But when we applied for a mortgage and the mortgage company pulled our credit report, the FICO scores that they came up with were much lower than the report that we pulled two months ago. They said my “mid” FICO score was 675 and husband’s was 652. This caused us to get a higher mortgage interest rate than we were originally quoted. We are pretty upset. Could our credit scores really drop that much in only two months? We have not opened any new credit cards or purchased a car or done anything in the past two months, so this doesn’t make sense. Please explain how this could happen.
Answer: This has become an increasingly common problem with all the advertising for free credit report services.
There is only one website where you can truly get a free credit report from the three national credit reporting bureaus: Experian, TransUnion and Equifax. That website address is www.AnnualCreditReport.com
You are allowed to request one free credit report every 12 months from this website and it is totally free.
However, if you want to see a copy of your FICO credit scores, you must pay for that because it is provided by a separate service. The problem is that there are several different kinds of FICO credit scores and the scores that you get from the paid credit report services are often better than you will get when a mortgage company pulls your credit report.
Fair Isaac was the originator of credit scoring based on a complex computerized model that takes into account a wide variety of factors, including your past payment history, the amount of money owing on each of your credit accounts compared to the total credit limit for each account, length of time your credit accounts have been established, the number of recent credit inquiries and new credit accounts; and the total number of active credit accounts on your credit report. Each of the three credit reporting bureaus generates their own credit scores based on your credit data.
FICO credit scores range from about 450 to 850. Anything above 740 is considered excellent credit. Your credit scores are a snapshot of your credit picture at the moment that your credit report is pulled. The scores can change dramatically in a couple of months, or even in a couple of days if your credit balances have changed.
For example, we recommend that our mortgage clients try to keep their credit card balances below 40 percent of their credit limit in order to receive a high credit score. But that is not always possible. If you have a $5,000 credit limit on your credit card and your balance on that card was $1,000 when your credit report was pulled a month ago but the balance is $4,000 when your credit report is pulled this month by a mortgage company, your credit score could drop dramatically because your credit card balance is now 80 percent of your credit limit compared to only 20 percent of your credit limit when your credit report was pulled the first time.
Another factor to consider is that not all FICO credit scores are the same, even with the exact same credit reporting data. A FICO score pulled by a mortgage company takes into account many more credit factors than a FICO score pulled by a retail store or a car dealer, so the numbers will be different. It would not be unusual for your retail store FICO credit score to be in the 700s while your mortgage FICO credit score is in the 600s. That’s because the computer models used to analyze your credit data for the mortgage lenders are different than the models used by retail stores, so you get different results.
The bottom line is that if you are considering buying a home or refinancing your mortgage and you want to know what your credit scores are before you apply, ask a mortgage company to provide you with a “three bureau merged credit report.” That should cost you about $35. The report will contain data from all three credit bureaus as well as credit scores from all three bureaus. In the mortgage business, we generally use the “mid” score, which means we throw out the highest and lowest credit scores and use the one in the middle. Obtaining a true mortgage credit report is the only way to find out what your real FICO scores are, as these are the scores that will be used to determine your mortgage interest rate. The FICO scores that you get from the so-called free credit report services are meaningless.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail him at firstname.lastname@example.org.