Credit Reports And Scores Know The Differences
Do you understand the difference of credit, reports, and scores? Call so I can clear up the mud!.....
· Credit, credit report and credit score are not interchangeable terms.
· Consumer-facing credit reports give scores that might not translate to mortgages.
· Only a lender can tell a client how much house they can afford.
First-time homebuyers look to agents to fill in knowledge gaps.
Credit, reports and scores — know the differences
First, let’s start with the basics. Credit, credit reports and credit scores are often bandied about interchangeably, but they’re not the same thing. Credit, according to Experian, is “borrowed money that you can use to purchase goods and services when you need them.”
A credit report contains information about past and current credit accounts. A credit score is “a grade that’s given to your credit report,” according to Wells Fargo.
Credit reports come from the credit bureaus, where information (balances, length of loan, standing) on various kinds of credit (auto loans, mortgages, revolving, medical, etc.) is documented. The three major credit bureaus are TransUnion, Equifax and Experian.
The Fair Isaac Corporation (FICO) calculates what’s reported into scores using proprietary software — this is where the term “FICO score” comes from.
FICO scores are the basis of what most lenders use but don’t include some factors that matter to mortgage lenders (employment, number of credit cards).
The newer VantageScore is making headway with mortgage lenders; traction has increased since December when House Resolution 4211 allowed Fannie Mae and Freddie Mac to use alternate scoring methods.
VantageScore is making headway with mortgage lenders.
This method looks at credit reports plus recurring payments (utilities, etc.) and goes back 24 months (FICO looks back six months). This can be helpful for clients with limited or weak credit histories. Scoring used to be difficult to understand, but it has been updated to align with the familiar 300 to 850 model known by FICO users.
If your client has an old VantageScore report, you can refer to the conversion chart, but it’s best to get something current. Be aware that the report compares the individual’s repayment behavior against other borrowers to predict how well they will make payments in the future.
So if a lender starts with a VantageScore that shows a client was inconsistent about paying rent on time, the client might have a lower-than-expected score.
Consumer credit sites
Online consumer-facing sites such as Lifelock and PrivacyGuard use scores that are not the same as FICO scores. They’re known as “educational scores” meant to keep consumers aware of credit history and activity.
Plus, algorithms for mortgages, car loans, retail cards and other forms of credit are calculated differently. Delinquencies and other negative marks are also weighed differently, as well as loan balances and length of credit history. You simply can’t know what your client can afford based on these sites.
You simply can’t know what your client can afford based on these credit score websites.
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