As a business Owner you track your FICO score and keep track of your credit information. However, when you try to secure a loan for your business you find that the score you had pulled on a free credit report system is very different than the score the lender pulls. What you should know about credit scores.
Many business owners will periodically check their credit reports and scores to verify the accuracy of the information displayed to ensure there is no fraud and they are credit worthy. Even people who may not track their score regularly may check their score before trying to secure a business or personal loan. Armed with their score they go to get their loan and they are Surprised to find out their score is much different than the score the bank has pulled! This happens all the time. In fact the two scores differ far more frequently than they match. But why would they be different? A number of issues are involved but the basic reasons are:
- Different algorithms used by different companies
- Different bureaus which may have different information
- Dates when credit was pulled
Banks and lenders use different reporting agencies which use different algorithms to decide the credit worthiness of an applicant
The credit reports pulled by consumers are frequently different scoring algorithms than those pulled by banks, lenders, and credit card companies. Sometimes they are completely different algorithms developed by different modeling companies, sometimes they are industry specific variations, and sometimes a custom algorithm may be utilized.
Many Modeling Companies
Credit risk algorithms are set depending on the particular companies demands. Fair Isaac (FICO) is the most well known score, and the most widely utilized in the industry. The three credit bureaus formed a strategic alliance to compete directly with the FICO risk score and developed an alternative: the Vantage risk scores.
When a consumer pulls his or her own credit score, they are most frequently viewing a Vantage score. Consumers need to contact the bureaus in order to see their report, and the bureaus choose to provide the Vantage risk score. The bureaus charge money to provide the score, and keep the revenues without having to pay Fair Isaac a royalty.
When bank or lender pulls a credit score in connection with a loan application, most frequently they are using a FICO score. The FICO score has the dominant market share for generic risk scores used by lenders. The scores are different because the algorithms are different.
Even if a consumer pulls his own FICO it probably won’t match what the finance company or bank pulls.
Even if a consumer pulls his own FICO score it may still be a different algorithm than what the bank or lender pulls. Most generic scores try to improve their predictive ability by tweaking it for various industries: auto lending, credit card, mortgages, etc. A consumer rarely sees the industry specific score, but the bank often does when it uses an industry overlay model.
Custom or Generic Scores
Banks and lenders also use custom score systems. Vantage and FICO scores are generic. A suit off the rack will never fit as well as a custom tailored suit. So many banks develop and use their own custom model scores, rather than a generic FICO or Vantage score or a combination of it all.
Bureaus usually don’t have the same information
Even if a consumer is comparing apples to apples (FICO vs FICO or Vantage vs. Vantage), the three credit bureaus have different scores. Even though a 675 means the same thing at each of the bureaus, it is highly unlikely that same consumer will have the same score at each of the three bureaus. Some companies report to one bureau slow pays while not reporting to others. Geography plays a big role in which bureau a company may report to and which bureau a bank or finance company may pull. Some lenders pull all 3 scores and use an average of all 3.
Credit scores fluctuate with time
Credit scores pulled at different times maybe different. Credit scores do fluctuate over time. Credit bureaus update their information regularly and may change algorithms. Also, pulling multiple reports at the same bureau in a short period of time can change the score.
How does inquiries affect my score?
The order in which the two scores are pulled may impact the variation in scores. When a potential borrower requests a copy of his or her own score or report, a soft inquiry is logged. Soft inquiries are not part of the risk scoring algorithms used by the banks and lenders. Soft inquiries do not affect the scores viewed by lenders, so when the consumer pulls the score first there is no impact.
Hard inquiries pulled by lenders typically won’t affect the score unless multiple reports are pulled from the same bureau in a short period of time.
Pamela Hewett is the CEO of Professional Funding Corporation. She has been in the finance industry for 17 years. She has worked for national finance companies such as American Express and Citicapital; before starting her own business 1o years a go. She helps businesses with consulting on loans for SBA, commercial, real estate, equipment leasing, bridge and unconventional loans.