When a first-time homebuyer purchases a credit score on the recommendation of a reputable financial institution, he or she will be under the pretense that it’s the same score that will be used when a lender underwrites their loan.
Furthermore, advising a first-time homebuyer to visit www.annualcreditreport.com is great advice; however, it is somehow misleading. There is an alternative. Let me explain.
A little background
The Fair and Accurate Credit Transactions Act of 2003 (FACT Act or FACTA) is an amendment to the Fair Credit Reporting Act that provides consumers a free annual credit report (not a score, a report) from each of the three credit reporting agencies (CRAs) once a year. It’s intended to help consumers make a better decision when applying for any type of credit.
However, each of the credit-reporting agencies has its own individual format for this free report with numerous legends and prefixes, which makes a consumer feel helpless in understanding the information.
The only thing all three CRAs have in common is the continuous bombardment of messages on almost every page of the free online annual credit report.
Each of these firms continue to offer consumers additional fee-based information and services, such as throwaway credit scores, credit-monitoring and identity-theft protection packages — all of which are totally unnecessary.
Furthermore, the majority of consumers today believe a credit score and a credit report are one. That is absolutely false. The three CRAs continue to spend millions of dollars every year to promote the message of one — with incredible success I might add.
The FICO score
The FICO score is 25 years old this year, and 90 percent of all financial institutions use it.
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To avoid royalty fees, each of the three credit reporting firms created their individual scores. They promote these scores as an “Educational Score” and offer them for free to lure consumers to sign up for their services while deceptively hiding their insignificance such as Score Plus from Experian, Trans-Risk Score from Trans-Union and Equifax Credit Score from Equifax.
Courtesy of MyFico.com
Furthermore, in 2006, all three reporting firms teamed up and created a common score: vantage credit score. They continue to disingenuously market to real estate associations, with the hope that Fannie Mae, Freddie Mac, FHA or VA would consider using it. It never happened, and most likely, it will not ever happen.
For example, these three giants (credit reporting firms) first introduced Vantage score to consumers with a score range of 500 to 990. However, to put up with demands from important lenders who give this score for free, a version with a score range of 300 to 850 (as in FICO) is provided. It makes it deceptively more believable.
Sadly, these same lenders use FICO score when approving their loans — confused yet?
Furthermore, data brokers such as Credit Karma and hundreds others buy these meaningless scores in bulk and offer them to consumers for free. In exchange, these data brokers gain access to credit profiles for life. The historical data of the homebuyer is then sold to countless industries.
Straight to the source
Today’s homebuyer is learning more and more that a pristine credit score translates to a lifelong lower monthly mortgage payment.
To get scores actually used by lenders, many consumers are choosing to pay a one time fee of $19.95 at myfico before approaching a lender and before applying for a mortgage.
The homebuyer gets a personalized credit report with a FICO score that’s used by mortgage lenders. In addition, he or she will also receive other FICO score versions used by auto and credit cards lenders for free.
The price includes access to a score simulator (what-if tool). For example, by paying down specific revolving account or accounts, or disputing inaccurate information online with links and contact information to the three CRAs dispute processes, can rapidly improve credit score, and therefore, give you a better loan rate and term.
When choosing one reporting company to get one score, Experian is a safe bet. Most creditors use it when reporting their clients’ account information.
Homebuyers can also get their own free FICO credit score. Since 2013, credit card providers such as Discover, Barkley and others added a current FICO score (not a report) as an integral part of their customers’ monthly closing statement. These closing statements also show who the data provider is — check it out.
Lenders admire informed borrowers
Major lenders provide applicants with scores (not reports) for a reason. The expectation is that the responsible applicant has previously reviewed his or her credit file.
Providing a homebuyer with valuable information is vital to a successful transaction and fruitful relationship.
Clear as a crystal ball
myfico only makes and sells FICO credit scores that lenders use.
As a full disclosure, I do not work for FICO.
I encourage you to educate, empower and prosper.
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Nabil Captan is the founder and CEO of Captan and Company. You can follow him on Twitter @nabilcaptan or on LinkedIn.