Not All Credit Scores are Created Equal

April 11, 2021

A take from Justin Crowley, Sr. Loan Originator at First Western Trust

These days, when it comes to financing real estate (or anything, for that matter), a person’s credit score can spell the difference between an amazing rate and an embarrassing one. Simply put, it’s the single greatest factor in determining what a person qualifies for, and what it could cost them. This “FICO” score, however, can be a misleading indicator, depending on where it originates.

Many decades ago, the Fair Isaac Corporation (FICO) developed a scoring model, which analyzes a consumer’s debt history and produces a “score” that would, in theory, determine the likelihood that he or she would default on a debt. Modern FICO algorithms factor in 150+ variables including payment history, account age, and utilization ratios to determine whether or not a particular
person is a good risk or a bad bet – inevitably determining how much a lender will charge to extend credit. And while it’s far from a perfect model, it’s the one used for nearly every consumer
financing process in the U.S., including mortgages.

Believe it or not, the average consumer has at least 56 different FICO scores. There are three, and only three, used for nearly all mortgage products, nationwide. There are roughly another dozen used for every other financial transaction type, ranging from car loans and credit cards, to insurance policies and personal lines of credit. The rest, well, are virtually meaningless.

Those additional 40+ FICO scores are used purely for promotional purposes, and can be up to 70 points off (in either direction) from a true/financial score. Their soul and specific purpose is to promote engagement, simply so that a company can market a new debt or service. Any time a person sees a FICO on his or her credit card statement or “free” credit monitoring system, it’s one of
these “promotional” scores.

So the next time your clients references their FICO (either through bragging or lamenting) be sure it’s from a true financial source, and not just an alleged measure of their “karma.” Chances are, their legitimate credit situation could be very different.“

First Western Trust – NMLS# 477166 – Equal Housing Lender