No Substitute for the FICO Score
One of the first steps in securing a home loan is determining the borrower’s credit score. With multiple credit bureaus reporting on different factors, the borrower may see multiple versions of their credit score. Additionally, lead generation websites are constantly phishing consumers to get their free “credit scores.” HousingWire reports that new research suggests that the VantageScore is not the same as a FICO score despite claims asserting otherwise.
Proponents of non-traditional credit scoring websites insist that because multiple versions of the FICO Score exist, no single FICO Score represents a consumer’s actual credit score. This argument implies that the FICO and VantageScore are interchangeable. FICO uses three credit scores from each of the three national consumer reporting agencies (Equifax, Experian, and TransUnion), for a total of nine widely used scores. The versions differ based on the line of credit the borrower is applying for and may produce different scores. FICO estimates an average 62-point difference between a consumers’ high and low scores from a single agency.
Many of the scores that consumers get from “free credit score” sites do not accurately reflect the borrowers’ credit-worthiness. HousingWire cites between 15-20% of the free scores produced online are not scored by traditional FICO standards. Additionally, about 65% of consumers think they are getting a FICO score when they are not. FICO is unable to generate credit scores for use in underwriting mortgages, auto loans, and other credit products for approximately 28 million consumers. In the case of free credit score websites, providers calculate scores on the basis of monetizing as many consumers as possible.
Underestimated scores may ward off potential borrowers who believe their score is too low to apply for a home loan and overestimated scores may lead to problems for other borrowers who think their score is higher than it is. Lenders, investors, regulators, insurance providers, and other financial agencies rely on FICO scores to determine credit-worthiness. This disparity in credit scoring can lead to misinformed consumers making financial decisions without all the facts.