Did you see the recent CBC clip on the “variety” of credit scores out there? You may have been shocked by the information.
I wasn’t. In fact, I thought it was even somewhat muted—could have been more dramatic than it was.
As a rent 2 own provider/coach, I deal a lot with credit scores, so it’s my duty to stay on top of such things. The CBC clip was well done, but didn’t even tell the whole story.
For those who haven’t seen the report, click here for the text of the clip.
So, why are there so many different credit scores? Here’s why: There are two credit reporting bureaus in Canada: Trans Union and Equifax. Financial institutions report your activity to one or both of them, usually monthly. But, it costs money for the lenders to affiliate with these bureaus. Not all register with both of them. Those who are registered with both will, presumably, report the same information to each agency at the same time. But those who are registered with only one of them will obviously report only to that one. Thus, the data at the two bureaus is not necessarily identical. This explains some of the discrepancy.
But why then, isn’t your Credit Karma score, which is based on Trans Union data, the same as your Trans Union score, and, similarly, your Borrowell score the same as your Equifax score? Your score is based on an algorithm that takes all the data it finds at the Bureau and compiles it into a score. Each company has their own algorithm based on their own goals. One may weight one piece of data more heavily than the other. So, although the data may be the same, different goals means different algorithms and ultimately, different scores.
That may seem unfair but it is important to note that these are private businesses, compiling credit scores for their own purposes (for Credit Karma, for example, it’s to get you a credit card), and offering you the score they’ve calculated as a service to you (and a big part of their marketing strategy).
The CBC clip also refers to the fact that most lenders will not rely on any of those four scores, but will use a fifth, the Beacon or FICO scores. It notes that one of the participants’ FICO score was much higher than any of the other four scores. This may or may not be typical. While I don’t have access to FICO scores, other sources have told me it is often lower, not higher.
So there are at least five different scores. We could wish that was all. There are even more than that. Not indicated in the clip is the fact that some of the big lenders, like the largest banks, have their own algorithms, created, like the others, for their own purposes. So, if you are getting a loan from one of those sources, their algorithm may calculate a score different from any of those five, from the very same data.
There’s another variable not mentioned in the clip, the fact that the bureaus are limited to the information they receive on the consumer, and this does not necessarily include a social insurance number. They depend on such things as names, birth dates, addresses and employment data. If you change your name or address or employment from what the Bureau has on record, and the mismatch is too great when a lender reports your activity, a new profile may be created for you. This is to protect the information from going to the wrong person. Now you will have two different profiles at the same bureau. Depending on the information the reporting agency has on you, future reports may go to one or the other of those profiles. Obviously, the two profiles will produce different scores. It is known that many people have multiple profiles, some more than two.
The whole system seems a bit unfair. But, as stated above, the credit bureaus are private corporations with their own goals. How can we therefore judge them for not being identical?
What is most unfair, it seems to me, is the heavy weight that the lenders put on the bare scores. The CBC clip indicates that lenders look at the total report, not just the scores, and this is good. And when we coach our clients, we always emphasize five or six other very important factors that the reports must also show in order to qualify for a mortgage.
But, when CMHC has strict guidelines based on scores, and the lenders need to follow the cues of CMHC, then the scores become too deterministic, despite the other factors.
So what should a consumer—a rent 2 own client—do, given the credit score muddle?
- Aim high, not for the bare minimum score!
- Check your scores from more than one bureau!
- Inform the bureaus whenever you change names, addresses or jobs!
- Correct any errors on your report!
- Follow the advice of your credit coach!
- Don’t procrastinate! In all algorithms, time is a healing factor. If you fix something in the first year of your rent 2 own it will have a greater impact on your credit score at the end of the third year than if you wait until the third year to fix it.