Understand why your credit scores can vary.
We get the “why are my credit scores different” question a lot. And for good reason: it can be confusing. You check with Nav and see your scores, but then your lender says your score is different. It usually goes a little like this: “I see my credit scores with Nav and my highest is a 734. But, I applied for a loan and the lender said my score was a 657, a difference of 77 points! I know something is wrong.”
There actually is a good explanation for this. To understand why credit scores can vary, you need to know how they are made, what scores are out there and who uses which scores.
What factors go into a credit score?
A basic understanding of what factors are considered in creating a credit score is essential to understanding why there are different scores and why scores can be different across credit bureaus.
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Most credit scores are based on 5 factors:
- Payment History (35%)
- Debt Utilization (30%)
- Credit History/Credit Age (15%)
- Credit Inquiries/New Credit Checks (10%)
- Types of Credit (10%)
Payment History: Payment history is typically around 35% of your score and has a substantial impact on a consumer’s credit score. Late payments are the issue here. The more recent the late payment, the more it affects your score and the more late payments there are the more it affects your score. A new late payment can drop your score as much as 100 points.
Debt Utilization: Revolving debt is also a substantial factor and accounts for roughly 30% of your overall credit score. It measures how you manage your debt compared to your account limits. It is simply a measurement of the balance to limit ratio. For example, if you have a credit card account with a $5000 limit and have a $1000 balance, your balance to limit ratio is 1:5 or 20% revolving debt balance. This is measured both for individual accounts and as an aggregate ratio of all revolving accounts. The higher your ratio is, the more it impacts you credit negatively. The bottom line is the lower your credit card balances, the better.
Types of Credit: Credit diversity or credit mix is a measure of how mature your credit is in terms of types of accounts. A credit report that indicates the consumer has a few credit cards, an auto loan, and a mortgage is will have a higher credit score than someone who only has a few credit cards. More diverse your credit isan indication that you are a good credit risk across different credit products – basically you can manage different accounts. Credit diversity accounts for roughly 15% of your credit score.
Credit History/Credit Age: Credit age simply indicates how long you’ve had credit and is measured by taking the average age of all your credit accounts. The older your credit the better. This accounts for roughly 10% of your credit score.
Credit Inquiries/New Credit Checks: New credit takes into account newly opened accounts and requests for credit history or inquiries. Each inquiry will typically drop your score a point or two and stay on your credit for 2 years. The inquires only affect your score for 1 year. New credit accounts for roughly 10% of your credit score and is best managed by being careful to apply for credit only when necessary.
FYI: Checking your credit scores with Nav is a soft inquiry and absolutely does not impact your personal or business credit scores.
How are Scores Made?
To understand why scores can differ from bureau to bureau and lender to lender, you need to how they’re made. Each of the three main bureaus is a credit data repository and a credit reporting agency. That means that they each gather credit data on consumers and businesses from creditors around the nation. Creditors report their data to the bureaus and the bureaus use that information to create credit reports and credit scores.
But, creditors don’t always report to each bureau, resulting in different information being reported to different bureaus.
To create a credit report, an inquiry to one of the bureaus is made. Imagine the request causing someone at the credit bureau to go into a room with all the credit data the credit bureau has at that time and gathering it all together and creating a report.
Once the report is created, a scoring model is overlaid on the report to spit out a credit score. So, even if you use the same credit report, using different scoring models can give different credit scores.
Different Credit Scores
There are also several different credit scores created by different financial institutions, the bureaus and other risk measuring institutions. The most well known credit score is the FICO score created by the Fair Isaac Company. It is the gold standard in credit scores and has the highest adoption rate among financial institutions.
In addition to the FICO score, each credit bureau has its own proprietary score. The credit bureaus have also created the Vantage score as a joint venture to compete with the FICO score. Additionally, large financial institutions will create their own proprietary scores that are not available to the public. Each score is intended to measure the risk of a borrower based on information in their credit report.
However, each score has differences in how they weigh the importance of the factors described above and the ranges in which a person can score. For example, the FICO score may put more weight on your revolving debt than Vantage and therefore, your FICO score will be different from your Vantage score.
In addition to each score weighing the above factors differently, there are a few other reasons your scores can be different.
Information is different between bureaus. Since creditors don’t report information to each bureau, each bureau can have different information. Because credit scores are based entirely on information in your credit profile, if information is different between bureaus, it will result in a different score. Perhaps you have an American Express card that reports to Equifax but not TransUnion. Your Equifax report will indicate a higher credit balance and higher credit limit than what is reported on TransUnion, resulting in a different credit score.
Timing. Credit scores are created in real-time. When an inquiry occurs, the bureaus check their records and overlay the scoring algorithm to spit out a credit score. Because they are real time, it is possible for your credit score to change from one minute to the next depending on what is being reported. For example, if you have paid your American Express bill and as a result, your revolving credit balance has dropped significantly, your score will be different on the day before it gets submitted to the bureaus as paid and the day after it has been recorded as paid. In this example, it is possible to see a significant score change depending on how much debt has been paid off.
As you can see, the answer to the question “why are my scores different?” can be complex. The bottom line is that you should make sure the underlying data is the same across reports, no matter where you obtain them. Having the right data reported is what is important. That’s why it is critical to monitor and understand the information being reported on your credit.
It’s also why we created Nav – we want to help you understand your credit so you can achieve your financial goals.
Ready to see your credit data and start building better business credit? Check Your Personal and Business Credit For Free (No Credit Card Required).