Fine print, Living with credit

In credit score calculation, loan type matters

Jeremy Simon

Just because you write about personal finance for a living most certainly doesn’t mean you’ve seen and heard it all before.

Case in point: I was aware that your credit score can vary based on which of the three major credit bureaus (Equifax, Experian, TransUnion) provides the version of the score you (or your lender) looks at. The reason is that a credit score depends on information collected by that particular credit bureau.

However, while reading a recent MarketWatch article, I learned that credit scores also differ based on the type of loan you apply for, such as a credit card, auto loan or home equity loan.

MarketWatch spoke to Ginny Ferguson, chairwoman of the National Association of Mortgage Brokers’ credit scoring committee. Ferguson explained that in addition to each credit bureau offering its own credit score, “there are as many as 10 different names and iterations of credit scores available to businesses, depending on whether you want to buy a car, apply for a credit card, an equity line of credit or a home mortgage,” MarketWatch says.

Are the credit bureaus and lenders just trying to make credit scoring more confusing for consumers? Not exactly, explains Ferguson, who is also a broker and co-owner of Heritage Valley Mortgage in Pleasanton, Calif. Credit bureaus have “taken the classic FICO credit score and modified those scoring models for specific industry end users, based on risk evaluation for that particular industry,” she says. That means the scores may vary depending on the danger you pose to that type of lender.

Fair Isaac Corp., creator of the well-known FICO score, has at least four industry options for credit scoring. “Fair Isaac has developed specialized credit scores for the auto industry for consumers’ car loan applications; for the banking industry to market credit cards to consumers; an installment loan version for industries offering home equity loans and a fourth version, a personal finance industry option, for other types of personal loans,” MarketWatch says.

Companies in different industries may rely on various versions of Fair Isaac’s credit score software and financial analytics. Ethan Dornhelm, senior scientist in Fair Isaac’s Scoring Solutions division, explains that industry-specific loans allow lenders to tailor the availability of credit based on the consumers’ history of repaying similar types of loans.

“Credit reporting agencies and businesses don’t have to tell you upfront which model they’re using,” MarketWatch says. “Of course, once you know there are different computations out there, you can ask the agencies to tell you exactly what type of score you’re getting.” The National Association of Mortgage Brokers’ Ferguson and Fair Isaac’s Dornhelm both urge consumers to shop around if they don’t believe a particular credit score is accurate.

Readers — have you noticed that your credit score differs depending on the type of loan you are applying for?

Consider your comments another chance to make this writer aware of what else he may not know about credit scoring.

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