You probably know that your credit score refers to a number that reflects your credit “health,” and provides lenders with an insight into how likely or not you are able to pay off debt. But what you may not know is that there are different types of credit scores.
If you’re thinking about buying a new home in the Northwest and applying for a loan, opening a new line of credit, or simply want to improve your understanding of your financial picture, knowing the difference between credit scores, credit bureaus, and credit scoring models is essential.
First, it is important to understand what a FICO score is. Deriving from the name of its founder–the Fair Isaac Corporation – the FICO score is a general purpose credit scoring system that was created with the intent of eliminating inconsistencies between each lender’s own system. Most of America’s credit reporting agencies today use the FICO score algorithm in order to determine a consumer’s credit. Keep in mind, however, that not all credit reporting agencies use the FICO score. In fact, there are a number of different credit calculating models that are used, including BEACON, EMPIRICA, and VantageScore. VantageScore is currently FICO’s biggest competitor.
Not only are there various credit algorithms, but even the FICO has created more than 60 different scoring models in less than a decade. For example, there are FICO scores for financing a new car, buying a home, or applying for a credit card.
The next thing you need to know is what a credit bureau is. There are three major credit bureaus in the United States, and most consumers have information collected by all three. The credit bureaus that are most often referenced are TransUnion, Equifax, and Experian. This means that you will have three different FICO credit scores based on the information that each credit bureau keeps about you.
Which Type of Credit Score Do Banks Look at When Making Decisions About Home Loans?
Because there are dozens of different ways to calculate a credit score, the “free score” that you obtain online may not be the true score that the bank will consider when making a decision about whether or not to lend you money for your new home (or anything else you’re seeking a loan for).
The most commonly used score that creditors and lenders use when making a decision about a mortgage or a loan is the FICO score. Most of the time, a lender will look at your FICO score through the cumulative lens of each credit bureau.
Why Is My Credit Score Different Between Agencies?
It is not uncommon for a consumer to request a free copy of their credit report through a site like Credit Karma or Mint (these credit scores are called “educational scores”), or to pay for a credit report from the three major credit bureaus and notice inconsistencies. This can happen for a variety of reasons, including the scores were collected on different dates, each score was calculated using a different scoring model (i.e. not FICO, or different versions of FICO), or the credit bureaus have different information about you.
Know Your Credit Before You Plan to Buy a Home
If you are thinking about buying a new home, it is very important that you have a general idea of what your credit score is, and how your credit score will affect your interest rate. Sometimes, those with lower credit scores can be denied a mortgage loan, or offered a loan with a much higher interest rate. While you can check your credit score for free, it may also be a good idea to request a credit report of your FICO scores from myFICO. Knowing your FICO scores can help you to plan for the future and set expectations.
Learn More About Your Financing Options for Your New Dream Home Today
One advantage of working with Hayden Homes when you are thinking about buying a new home is the fact that Hayden Homes provides financing options, where you can get pre-approved for a home loan with one of our preferred lenders. To learn more about financing for your new Hayden Home in Oregon, Idaho, or Washington, contact us today.
A new home isn’t something that you can only dream about; even if your credit isn’t the best or don’t understand your credit score, there are options available to you! Come see our Hayden Homes model homes today, and talk with us about financing and your options.