Land of Confusion: Demystifying Credit Scores.

Do you know your credit score? Perhaps you’ve checked your score with Credit Karma and it was 720 but when your Mortgage lender pulled your credit, they informed you that your credit score was actually 640. What is going on here? That’s a familiar scenario that I’ve heard over the years and this post/article is going pull back the veil behind credit scores.

This article is going to clear up a lot of the confusion and mystery surrounding credit scores. The common misconception is that there is one credit score and that couldn’t be further from the truth. The other conception is that the scores that are freely given to one by Credit Karma and other free sites are  the scores that are used in any financial transactions.  This also couldn’t be further from the truth. This article will pull back the veil and will give you the proper insight needed to fully understand what scores matter, why the confusion and most importantly, where one can go to get their ‘real’ scores.

Let’s talk about credit scores. Odds are that in the next 12-18 months, you will more than likely end up applying for any of the following: Pre-approval for a home loan, Refinance a mortgage, a personal loan, credit card or auto loan. The major thing here that you may not know is that each of the lenders or lending institutions that will pull your credit will be utilizing a unique version of the FICO score in determining your credit worthiness.  Whatever your score is will play a major factor in whether or not you are approved and for how much you are approved for.

Why do they use FICO?  A little background on FICO, FICO stands for the Fair Isaac Corporation. They are a data analytics company that was founded in 1956 by Bill Fair and Earl Isaac. The first general-purpose FICO score made it’s debut in 1989. Fannie Mae and Freddie Mac began using FICO scores in 1995.

Since FICO was the first scoring model to make it to market, it currently enjoys a 90% market share in the majority of lending applications.

Fun fact: In 2013, lenders purchased more than 10 billion FICO scores and about 30 million American consumers accessed their scores themselves.

Why do they use different Versions of the FICO score?  Because each version’s algorithm is calibrated to determine what is the likelihood of a borrower defaulting on that specific type of debt obligation (credit card, auto or home loan) by 90 days or more. That is the sole function of the credit score.

Scores used in mortgages:

(FICO Score 5 at Equifax, FICO Score 4 at TransUnion and FICO Score 2 at Experian)

What are the scores that are given freely on sites such as Creditkarma, creditsesame and many others?

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Land of Confusion: Demystifying Credit Scores.

Do you know your credit score? Perhaps you've checked your score with Credit Karma and it was 720 but when your Mortgage lender pulled...

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