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A Good Credit Score Does Not Guarantee Loan Approval

Do you believe your credit score has meaning? 

If so, you might be interested in this post. I have a free credit score checking app that provides me with the following services:

  • Checking my credit score 24/7
  • Real-time messages if my credit is checked
  • Monthly reporting of any changes in my credit score.

Even though I rarely exceed 30% of my available credit and pay all my bills on time, my credit score fluctuates. Why? No one has been able to provide an explanation. So, I decided to do some research on the credit reporting agencies and the following is what I came up with.

There are two national credit reporting agencies in Canada. Equifax and Transunion and three in the USA; Equifax, Experian, and TransUnion. The scores each one provides can vary anywhere up to 15%. Why? The credit lending community uses different credit scoring models for different purposes. Each score is built using slightly different factors, depending on its intended use. Some credit score models may incorporate mortgage and/or mobile phone payment information in the calculation, for example, while others may not. Also, the reporting agencies use different algorithms and there is different information reported to each company, An agency such as TransUnion places more weight on your employment history or personal information.

According to Richard Moxley, author of The Credit Game, chasing a perfect credit score is a waste of time and money. There are definitely minimum scores that people should keep in mind and there is no disputing the higher your score, the more trustworthy you seem to banks, lenders, employers, even landlords. But a high credit score doesn’t guarantee that you’re going to get approved for the best rates and terms. As a former mortgage broker for eight years, Moxley advises he saw countless times where a high credit score was on a loan application form but the prospective homeowners would still get declined for a loan.

It seems banks and lending institutions do not just use the credit score you have access to, to make a final determination as to whether you qualify for credit. Your credit score, a three-digit number, is calculated from the data in your credit reports. It is designed to predict how likely you are to repay borrowed money. They also use what is called a FICO score. It was created by the Fair Isaac Corporation back in 1989.

A score doesn’t tell lenders everything. Many also look at your credit reports from the major credit bureaus. Credit reports contain your payment history, which is a record of how you’ve managed to pay your debt. Lenders may look for all of the following:

  • Delinquent accounts, meaning those paid more than 30 days late.
  • Unpaid collections accounts.
  • A past bankruptcy.
  • Foreclosures.
  • A number of recent applications for credit.
  • Outstanding debts.

While one or more blemishes might not be deal-breakers, having one, two or more on your credit reports can affect both your loan approval and your interest rate if a loan is granted. If you are not sure what your credit profile looks like, you should know you are entitled to a free copy of your credit reports from the major credit bureaus every 12 months. You can access them by using AnnualCreditReport.com, then review the information to fix any mistakes and to understand how lenders view you.

FICO score (previously known as the Beacon score) is king in the credit reporting world. FICO Scores are used by 90% of top lenders to make decisions about credit approvals, terms, and interest rates. So how does your FICO score relate to your credit score? Are they the same thing? Is one more important than the other? Chances are when you apply for a mortgage, an auto loan, credit card, or a new line of credit, the bank or lender is looking at your FICO score. If you are a Canadian reading this post, the score that most Canadian lenders use is also the FICO score including major banks. However, Canadian consumers cannot access their FICO score on their own.

Also, something to keep in mind; you don’t have just one FICO score, as lenders use different FICO scoring models for different purposes. They use some versions for credit card applications, for example, and others for auto loans and others for mortgages. FICO also updates its scoring models as times change. The newest version is the FICO Score 9, though most lenders still use the FICO Score 8. Lastly, since you have a different credit report at each of the reporting bureaus, each report can result in different FICO and credit scores, even when the same scoring model is used to calculate the score.

An important point in your credit score monitoring is that while you can retrieve a credit score online, it may not be the one that’s used when you actually apply for a loan. And while the discrepancy might not always be significant (sometimes it can even be in your favor) some industry watchers say the differences are confusing at best and misleading at worst.

Consumers don’t even know what score they’re looking at, or if it’s the one used by lenders,” said Al Bingham, a credit expert and author. The credit-scoring world is a complex one, despite many consumers thinking their score is a number that is the same no matter where it’s presented.

“It’s unrealistic to expect that a number, whether from a website or credit bureau or anywhere else, will be the same number that some future lender is going to use,” said John Ulzheimer, a credit expert. “If it is identical, chalk it up to luck.

So all the TV and Internet commercials offering you free credits scores are very nice but they provide a false sense of security. FICO scores are considered the most widely used numbers in lending decisions across consumer loans and lines of credit and its scores are used in 90% of lending decisions, based on data audited by a third party.

If you have any comments, disagreements, or additional information on this post, please contact me either through Pippies, or through my website.

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Post Image Credit: Stephen Phillips – Hostreviews.co.uk, Unsplash.

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Written by Michael Trigg

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