Although people often refer to your credit score in the singular, you actually have three -- one from each of the major credit rating companies. Since the "Big Three" do not coordinate with each other, you will have a different score with each. Lenders usually account for this differential by taking the median of the three to determine your credit score.
Identification
In math, the median of any set of numbers is the exact middle. In the set of (1,2,4), for example, "2" is the median. When calculating the median of a customer's three credit scores, however, lenders take the middle of the three scores. Scores of 700, 720 and 750, for instance, would give a median result of 720. Some lenders use the relatively new VantageScore, which is standard across all three major bureaus so there is no need to take a median or average score.
Considerations
Although most lenders take the median of your three scores, some will average them out, according to Business Week. Some may not even look at your score from all three agencies, but check two or even just one. Also, some lenders opt for an alternative credit score. The Payment Reporting Builds Credit calculation factors in payments not used by the standard credit model, such as rent and utilities. Some lenders may even use a specialty credit scoring dedicated to a niche market, such as mortgages or car loans.
Importance
Typically you won't see more than a 10- or 20-point difference between your credit scores. If one lender has missing information or a mistake on your record, you could have a difference of 100 points or more between your highest and lowest score. A 50-point swing could cost you thousands over the life of large loan paid over several decades. Thus, you want the highest possible score from each agency when applying for a mortgage, but other factors will affect your approval and rate. Your monthly debt service to income ratio, for instance, can trump even the highest of scores. Usually, when debt to income exceeds 35 percent, lenders do not believe you can handle an increased debt load.
Tip
You can pull your credit report from each bureau for free once each year -- but this does not entitle you to see your score for free. To obtain a median close to what your lender sees, you will have to purchase a score from each bureau. You could avoid paying for your score by using a score estimator.
Boosting Score
If your report contains negative information, review it for accuracy and then try to mediate problem areas. Start paying bills on time and pay down as much debt as possible; credit card debt is usually the best to tackle first if you have excess income.
0 comments:
Post a Comment