Like many newlyweds, Tarah and Ryan of Littleton, MA, dreamed about becoming homeowners someday. Their first step? Getting a handle on their credit scores. A preliminary check in 2014 surprised Tarah; her score was lower than her husband’s.
“It wasn’t bad, but Ryan was concerned my score wasn’t where it needed to be,” she said.
Tarah set out to improve her credit score. She followed the financial advice her banker offered: avoid late payments at all costs and decrease her credit utilization by paying down debt, two factors that would have the most impact on raising her score. She also joined Credit Karma, the popular personal finance website that offers free credit scores to consumers.
At first, she started checking her score once a month. “I would see a commercial for [Credit Karma], and that would make me want to log in,” she said. Then, in January 2018 when the lease on their rental was up for renewal, Tarah and Ryan began house-hunting in earnest.
As Tarah’s credit score climbed, so did her obsession with Credit Karma. Once-a-month peeks at her score became daily drop-bys. Although she’d been told applying for a mortgage would have minimal impact on her credit score, she was dismayed when she logged in to Credit Karma one day and saw that her score had dropped by ten points.
“It was frustrating to see that, after spending four years getting it to close to perfect as I could,” she said.
The constantly changing credit score
What used to be a closely guarded secret shared only with lenders is a three-digit number from 300 to 850 you can access in a matter of moments today, for free, from your laptop or smartphone. All you have to do is give up your name, social security number, and a few other personal identifiers, and bingo! You have the number your lender will see.
The fact is, your creditworthiness has dozens upon dozens of numbers assigned to it, depending on the scoring method that’s used to develop it and who’s requesting your score, such as a credit union’s mortgage officer, department store, or auto dealer. Even FICO, short for Fair Issac Corporation, the grand-daddy of credit scoring, offers 50 different versions of your score that change depending on weighted factors of varying importance to lenders.
“Your score also depends on the credit bureau providing the data,” said Scott Post, Senior Vice President, Strategy & Delivery at Hanscom FCU, referring to the three major credit reporting bureaus Equifax, Experian, and TransUnion. “A lender may make an inquiry with one bureau, but not the others, which will result in differing scores between bureaus. There’s also timing: data changes from day-to-day, so the same report on one day can be different when it’s run with data pulled the next day.”
Places like Credit Karma, NerdWallet, Credit Sesame, and WalletHub aren’t the only venues offering credit scores to its members: financial institutions like CapitalOne, Discover, Bank of America, and more all offer credit scores, some even if you’re not a customer. (Disclosure: Hanscom Federal Credit Union offers a free credit report and score review for its members.) Even the three credit reporting bureaus, along with FICO, offer consumer accounts for a fee.
The price of a “free” credit score
Then there’s the word “free.” Your score may not cost you money, but you will be giving something up in return for the service: data. “If you don’t have an account relationship with the company,” said Post, “you’re providing them with personal data they can monetize.” For example, Credit Karma makes money when you apply for credit cards they suggest to you, suggestions based on your credit score obtained from information you submitted when you signed up.
A financial institution like a bank, credit union, or credit card company with whom you already do business may not be monetizing your data, but they also reap gains by offering credit scores. “It’s a form of relationship building,” said Post. “The consumer is not giving them any personal information they don’t already know, and the institution benefits when they have a strong borrowers who are more likely to handle their accounts in a satisfactory manner.” As an example, Hanscom FCU will work with a member to help them raise a credit score, then refinance a loan at a lower interest rate when the score improves.
Still, Post thinks sites like Credit Karma and WalletHub offer more positives than negatives to consumers. “These sites and apps raise mindfulness around credit, and that’s a good thing. They get that conversation going,” he said.
As for Tarah and Ryan, they closed on a house this spring, but in an ironic twist, Tarah’s stellar credit score didn’t matter: her husband got the mortgage in his name to take advantage of a special program for first-time homebuyers. With her credit cards and auto loans paid off, and no mortgage payment being reported to credit bureaus, Tarah’s a little worried how her outstanding credit score will fare.
“But I won’t be checking it every day like I used to,” she said with a laugh.
The best ways to use a credit score app
Here’s how to make consumer credit score apps and sites work for you:
- Most sites will tell you how often they update your credit scores. If you’re checking daily and the site updates their scoring once a month, you’re not learning anything new until your score refreshes.
- Focus more on trends and less on fluctuations. A few points down one month, a few points up the next are normal. What you want to pay attention to is a significant drop (50 or more points) or a downward drift in your credit score over several months, which could indicate a reported delinquency, an account sent to collections, or a utilization rate that’s creeping upwards.
- Remember that the numbers you’re seeing aren’t necessarily the numbers your lender will see, although if you’re getting similar results across a variety of platforms and scoring models, chances are good your lender’s credit score will reflect a number that’s similar.
- Your credit score is only part of who you are as a borrower. Credit decisions are made not only with credit scoring data, but with other information, such as your cash flow, debts, income, down payment, and/or collateral.
- Read the fine print of any site you join or app you download that offers you a free credit score. The disclosure should tell you how they will use information you provide, and should also tell you what scoring model they use.
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