Credit

How to Navigate the Three Credit Score System

Each of us has three credit reports housed by the three major credit reporting agencies; Experian, Equifax and TransUnion.  And for most of us those three credit files are scoreable, as I explained last week on Mint.

And while it’s a fact that none of us has just three credit scores, it is a fact that most lenders will make decisions using just one of our credit bureau risk scores.  That means when you apply for a credit card or an auto loan the lender is going to buy one of your three credit reports and one of your three FICO scores or, less frequently, one of your three VantageScores.  The only exception to that “one report, one loan” rule is the mortgage environment where the lender will almost always pull all three of your credit reports, all three of your FICO scores, and then base their decision on your middle score.

How widely your scores can range

Each of your credit scores is going to be different, primarily because the information in our credit files is never 100 percent identical.  And because of the common lending practice of only pulling one credit score, it’s almost a guarantee that lenders are going to see different numbers for us depending one which of our three credit reports they happen to purchase.

For example, my FICO scores vary by 24 points from my highest score to my lowest.  My highest score is based on my Equifax data and my lowest is based on my TransUnion data.  This means if I applied for any loan outside of a mortgage and the lender pulled my TransUnion credit report they’d see my lowest FICO score.  If that “lowest” score fell below the lender’s risk threshold, I could be denied the loan or approved but with less advantageous terms.

My example isn’t a good one because my scores are all pretty good so I’d likely still get approved even if the lender saw my lowest score.  But getting the lender’s best deal isn’t a slam dunk for consumers who either a) have a larger variance between their scores or b) have three marginal scores the begin with.  In fact I fielded a question two weeks ago from a guy whose highest FICO score was 748, which is very strong.  The problem is that his lowest FICO score was 658, a full 90 points off his high score.  658, as you probably already know, is not very good and is right on the borderline of being considered “subprime.”

The gentleman had a collection on one of his credit reports that wasn’t being reported to his other two credit reports.  This isn’t a terribly uncommon scenario as reporting to all three credit bureaus isn’t mandatory under any Federal or state laws.  What this does, however, is place any consumer in a position where they’re rolling the dice each time they apply for a loan because they don’t know a) what their three scores are b) what credit report is going to be scored the highest and c) what credit report and score their lenders are going to see.

The two examples I highlighted above (mine and the guy with the collection) are both what I would define as being bookend examples.  It’s been my experience that most consumers fall in between those bookends.  So the question is how can we ensure that we’re putting our best foot forward when we apply for loans?  Here are some things to keep in mind before you apply for a loan;

1. You can’t force your lender to pull one credit report over another

Lenders have what are referred to as “credit bureau preference tables” and they use those tables to decide which of your three credit reports they’re going to pull based on where you live.  Now, you CAN shop around and ask lenders what credit report they pull for consumers living in your local.  If you can find one who uses the same credit bureau where you’ve got your highest score, BINGO!  I call that “strategic shopping” and it takes shopping around for the best interest rate to a different level.

2. You can’t bring you credit report and score with you to the lender

Lenders will want to pull the report and score on their own so that it can be fed into their automated underwriting system.  There was also a pretty funny story about a guy in Butte, Montana a few years ago who used Photoshop to change information on his credit report.  He walked out with an auto loan but was arrested shortly after for loan fraud.

3.  Auto dealers will likely pull your credit report and then shop your loan around to other lenders

Those other lenders will also want to pull your credit report. This practice is very common and it can lead to lenders seeing different scores depending on where they’ve decided to buy your credit report and score.  If you know of a local lender in your area who uses the credit report where you’ve got your best score it’s not a bad idea to apply for the loan with them and “take the financing” with you to the dealership.  That’s your ace in the hole.  If they can beat that rate with another deal then take the better deal. Again, this is strategic shopping.

4.  Shelve your credit cards for one full cycle

The way the credit reporting system is set up the balances on your credit cards are updated only once a month and it’s based on your previous month’s statement.  If you pay your cards in full each month your credit reports are still not reflecting the $0 balance because it’s likely that you used them again during the following month.  Pay them off in full if possible and leave your cards in your wallet until you’ve closed on your new loan.  This ensures the lowest possible “utilization percentage.”  This strategy will work with all three credit reports and scores, not just one of them.

NOTE: We all have a fourth credit report housed by Innovis Data Solutions but that particular credit report is not scoreable under the FICO or Vantage scoring systems.  Further, Innovis doesn’t currently sell credit reports to lenders for use in underwriting.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.