Finding a first-time homebuyer who actually has the necessary credit score to qualify for a mortgage can be challenging. According to a study published by the Federal Reserve Bank of New York, more than one-third of Americans have a credit score below 620. What is even more alarming is the CFPB study that found there are another 45 million adults who are either un-scoreable or who do not have a credit score.

As consumers try to deal with their credit challenges, they are being bombarded with messages about their credit scores from many different sources. Some of these companies have created simulated scores which some consumers find misleading and confusing, especially when they rely on those scores as they look to finance a new home.

Credit Karma is one example of a company that generates simulated scores using the Vantage scoring model (Vantage score 3.0). Consumers frequently rely on the scores that are generated by this and similar companies before they apply for home or auto financing, only to find out that lending institutions utilize credit reports and scores that were generated from a completely different scoring model. Many people are often surprised to learn that their actual credit score is drastically different from the generated score they received online. One reason for this is that many simulated or alternative scoring models don’t take the same information into account as the reports on which lenders rely.

To the left is an example of repository reports used by many lenders.

Another Consumer Example of conflicting credit scores: Potential borrower contacts lender and has lines of credit but DOES NOT show a score. However, when the potential borrower pulled their credit off a website for free, he had a score in the mid-700’s.

His specific report pulled by the lender shows NO PAYMENT FOR 8 years.

The simulated or alternative model could be basing it on the positive payment history, whereas the repositories are basing it on current activity. Credit Score is a snapshot of what is going on today. Over the last 8 years, nothing has been going on. Therefore, no scores appear for this potential borrower.

Can you picture the confusion and frustration when the lender tries to explain that he doesn’t have a credit score?

It is also important to confirm that your personal information is correct with the bureaus as sometimes information is pulled in and/or NOT pulled into your report. If something doesn’t report, it’s not included into your FICO score. Therefore, It is critical to help consumers understand that not all credit scores are created equal, especially as it relates to obtaining financing for home ownership.

Here is a brief overview of different credit scoring models, the differences between actual and simulated credit scores, and the importance of knowing actual consumer credit scores.

FICO v. Vantage

The FICO score is a score that was formulated to evaluate creditworthiness by Fair Isaac Corporation, and was first utilized by lenders in 1989. A FICO score is calculated based upon the following five factors:

Payment history
Credit utilization ratio
Length of credit history
New credit accounts
Credit mix.

In 2006, to compete with FICO, the three major credit bureaus developed the Vantage scoring model. This model calculates credit scores using some of the same factors as FICO, but also incorporates some additional information. The Vantage factors include:

Payment history
Credit age and mix
Credit utilization
Balances
Recent credit applications
Available credit

Although Vantage has been making a push in recent years, FICO scores remain the industry standard across various financial sectors for evaluating consumer credit worthiness.

Actual v. Simulated

It is important to note the difference between actual credit scores and simulated credit scores. There are many websites, such as Credit Karma, that purport to provide consumer credit scores for free. However, consumers should be weary of putting too much credence or relying too heavily on those scores.

A simulated score is calculated based upon actual information in a consumer credit report, but it may not necessarily reflect your true credit score, which is promulgated by the FICO or Vantage models. There are many instances in which consumers review their simulated scores prior to applying for loan or other financial product, only to find out later that they do not qualify because their actual score is lower than the simulated score.

Importance of Getting Actual FICO Score

According to FICO, 90 percent of “top” US lenders use FICO scores when evaluating the credit worthiness of applicants. As the predominant scoring model in the US, consumer FICO scores will, more often than not, determine whether a consumer will qualify for the loan or financial product for which he or she is applying. It is imperative that consumers keep this at the forefront of their minds when devising a strategy or making a decision about when and whether they should apply for a mortgage or a car loan.

Whenever a consumer applies for financing, and the potential lender makes a hard inquiry (pulls the consumer’s credit), that consumer’s credit score is negatively impacted, and will decrease as a result of that inquiry. If a consumer believes that he or she will qualify based upon the simulated score, but is later denied, their credit score will take a hit unnecessarily.

Because of the potential negative effect that hard credit inquiries have on a consumer’s credit profile, it is imperative that consumers know their actual credit score prior to applying for loans. There are companies that offer monthly subscriptions, which include actual consumer FICO scores that are updated monthly. This type of service is invaluable for those who are serious about achieving and maintain credit health, and eliminating any guesswork when applying for loans.

In addition to accessing actual credit scores, here are some ways consumers can build and/or improve their credit profile.

Way’s to create a score:

Start using a credit card, if you don’t already. Using a credit card and paying it on time every month is a great way to begin establishing credit history.
For those accounts that are open, make sure to use them periodically. If you don’t use them, the creditor might close the account down which could have a negative impact on credit score.

30% affects Utilization. It is best to have several accounts with low balances distributed then it is to have fewer accounts maxed out. To figure utilization: Balance (divided) by Credit Limit = percentage. Lower than 10% recommended per account, this is one of the fastest means for increasing the over all credit score.

15% affects Established History. The longer you maintain open accounts with creditors the better. When first starting out, this may not be easy; but this is where getting added as an Authorized User to another persons established credit comes in best. Remember that the contributor must have an account that has long history; clean payment record; high credit limit, and low balance. Also need to check with the creditor to insure that they have a policy to report authorized user accounts to all three major credit-reporting agencies.

SPECIAL Note to quickly build accounts: Authorized user accounts are the best way to go; since you are not legally responsible for the debt rather than Joint or Co-Signer accounts. Also, if this account starts to report negatively; these accounts are usually easier to remove from the credit reports by either contacting the creditor or requesting termination of the relationship; or disputing through the CRAs.

Consumers should know that just because they can pull a score off the Internet, it does not mean that it is the score a lender will use to qualify them for home financing. Remember, not all credit scoring model are the same, especially as it relates to the mortgage industry. If you have a prospect who needs help building credit or assistance with their credit report, be sure to refer them to Get Credit Healthy. Get Credit Healthy uses true FICO scores when they work with customers. Plus, customers will work with the same Nonprofit, HUD Certified Credit Coach throughout the duration of their program. To learn more about Get Credit Healthy email cc@getcredithealthy.com.