What do banks use to check credit scores?
Most of us are familiar with the concept of borrowing and lending. You must have seen at least one person who often forgets to return the money borrowed.
It makes you think twice to lend that person because of their forgetful nature. Similarly, lending institutions would like to issue loans and credit cards only to those they deem creditworthy. CIBIL score is one of the important metrics used by credit institutions in India to measure the creditworthiness of an individual.
What is CIBIL Score?
CIBIL score is one of the most important factors that almost every financial institution checks while receiving credit applications from individuals. TransUnion CIBIL has tie-up with almost every bank to assess the creditworthiness of millions of individuals and enterprises.
A high CIBIL score reflects not only your excellent financial discipline but also your integrity.
Who calculates the CIBIL score?
TransUnion CIBIL is a credit bureau or credit information company, established in 2000, which is the first of its kind in India. The firm calculates the CIBIL score of individuals on the basis of consumer information stored in its stores. They are known for their accuracy and transparency in the calculation of scores.
Your credit score is a three-digit number that in essence reflects your creditworthiness. It’s not a complete snapshot of your overall financial picture, but lenders look at it when appraising you for credit cards, loans, and mortgages.
But like everything in the financial world, credit scores have their nuances. There are actually several versions of your credit score, and they all mean different things to lenders.
For most common loan decisions, such as personal loans and credit cards, lenders use your FICO score. Your FICO score is calculated by data analytics company Fair Isaac Corporation and is based on data from your credit report. Another scoring model, VantageScore, is a well-known choice.
If you are planning to apply for a mortgage, be aware that the credit score that appears on your application may be slightly different from the credit score you are used to. It can be different when you monitor your credit, or even when you apply for a car loan.
Banks use a slightly different credit score model when evaluating mortgage applicants. Below, we’ll give you all you need to know about the credit score you want to buy a home from.
The scoring model used in mortgage applications
While the FICO® 8 model is the most widely used scoring model for general lending decisions, banks use the following FICO scores when you apply for a mortgage:
- First FICO® Score 2 (Experian)
- Second FICO® Score 5 (Equifax)
- Third FICO® Score 4 (TransUnion)
As you can see, each of the three main credit bureaus (Equifax, Experian, and TransUnion) uses a slightly different version of the industry-specific FICO score. This is because FICO alters and tailors its scoring model to best estimate creditworthiness for various industries and bureaus.
It makes sense: Borrowing and paying off a mortgage requires a different mindset than keeping track of credit card balances and using credit cards responsibly.
The FICO 8 model is known to be more critical of high balances on revolving credit lines. Since revolving credit is less of a factor when it comes to mortgages, the FICO 2, 4, and 5 models, which place less emphasis on credit utilization, have proven reliable when evaluating good candidates for mortgages.
Mortgage lenders pull all three reports but use only
According to Darin Q English, a senior community development loan officer at Quantic Bank, mortgage lenders pull your FICO score from all three bureaus, but they only use one when making their final decision.
“A bank will use all three bureaus,” tells CNBC Select. “It’s called a tri-merge.”
If all three of your points are the same, then their choice is easy. But what if your scores are different?
“We’ll use that average score as a qualifying credit score,” says English. “Not the highest or lowest.”
If two of the three numbers are the same, lenders use that one, regardless of whether it is higher or lower than the other.
Can I get a free credit score from my bank?
It used to be that if you wanted to check your credit score, you had to pay a monthly subscription service or some cash just to get a look. However, since 2013, FICO (Fair Isaac Corporation) has allowed lenders to make previously difficult-to-obtain scores available to consumers for free through its FICO Score Open Access program. FICO announced in December 2018 that more than 300 million people can get their credit scores for free through the program. More than 170 financial institutions and eight of the top 10 credit card issuers participate in Open Access.56
Participating companies include Bank of America, Citibank, Discover, HSBC, Key Bank, Merrick Bank, Navy Federal Credit Union, PenFed Credit Union, Sally May, SunTrust, Union Bank and Wells Fargo.
Get your score
If your bank or credit card issuer offers a free credit score, you should be able to check your score by logging into your account online or by reviewing your monthly statement. There are also other resources that allow you to view your credit score or credit report for free. If you’re wondering whether you should pay to see your credit score, the answer is probably no. pet care adda
These sites don’t require you to provide your credit card to check your score, which means you can check it as many times as you want with no charge. “Caveat, I’ve noticed these scores are 60 to 70 points higher than the FICO scores of banks and other lenders,” says Pamela Capaldi, a certified financial planner and consultant in New York City.
And check your wallet to see your credit score for free. Some credit card processing, such as the Discover It Cash Back credit card, give you a free FICO score (the real bank-and-lender version) based on your TransUnion credit report along with your details once every month.
Conclusion
Your credit score affects your ability to get credit and the terms offered to you. Until recently, the credit score industry was pretty secretive, and it was difficult (or expensive) for most people to get their hands on their score. Today, however, an increasing number of banks and credit card issuers offer credit scores for free, which is extremely valuable to consumers who are trying to track and improve their credit health.
