Is the credit score you see different from what your mortgage lender sees?
If you go to Google right now and look for your free credit score, you'll find a lot of options. Equifax, Transunion, Borrowell and Credit Karma are all advertising a free credit score.
But that credit score you get isn't what the lender uses. Lenders use a score generated by Equifax, which is entirely different from what you get directly from Equifax. And sometimes, that difference can make or break your mortgage application.
That's because there is no single calculation for an individual's credit score. In fact, the scoring process in Canada is incredibly complicated, primarily confidential and constantly changing. That being said, there are a few key points that will help give you clarity on why your score may differ from your lender's and what to do about it.
There are two credit reporting agencies in Canada
The first thing to understand about your credit score is that it is coming from one of two credit bureaus: Equifax or TransUnion.
Both bureaus draw on similar data and consider many of the same factors when calculating a credit score. It's mainly the weighting of categories and the exact algorithm used that will create discrepancies between one bureau and the next.
When you request a credit report, you'll receive a fairly detailed summary, but this will not include the details of the algorithm or calculation, as this remains confidential in an effort to protect the bureau and the authenticity of the score. You should also note that these algorithms change regularly. Both bureaus come out with new systems every couple of years, which could affect how your score is calculated, how factors are weighted, and how various actions will raise or lower the result.
For instance, in a recent version of the algorithm, Equifax predicted a borrower's potential for going delinquent in the next 180 days, whereas TransUnion calculated the risk of a borrower going 90+ days delinquent within the next two years. These subtle differences can result in disparate scores for the same individual.
Financial institutions, including mortgage lenders, are free to use either bureau in order to check the credit history of loan applicants. Some work primarily with Equifax, others with TransUnion, and still others draw on both for their credit scores. If they do acquire credit scores from both bureaus, they're likely to use the lower of the two as an added risk management tactic.
The simplest explanation for the difference you're seeing in your credit score vs. the score your lender is showing you is that you used one credit bureau, and they used another. Equifax used a different scoring method than TransUnion, and it resulted in a slightly different score.
But there is typically more to it than that.
There are different algorithms for different sectors and different factors involved in the calculations.
If you're applying for a credit card, or a car loan, or a home loan, some elements of your credit history and habits could be more relevant than others. Your potential lender may want to focus on certain aspects of your credit report based on the type of loan you're looking to obtain.
For this reason, Equifax and TransUnion also have sector-specific rating systems that provide lenders more information than is presented in the base score. If you've ever heard the term Beacon score, this is referring to the mathematical model used primarily by Equifax to calculate credit scores, and it includes several sector-specific variations that are updated every few years.
This means that you could be looking at your base score while your mortgage lender is reviewing a more specialized report weighted toward factors relevant to homeownership. These calculations could fall on the conservative side, resulting in a situation where your lender ends up reviewing a lower score than you do.
You can find out which score your lender is seeing.
So what can you do about it? Simply ask.
Most brokers and lenders will disclose, upon request, which credit bureau they're drawing from, and which version of the credit score algorithm is being used. If you find that, for example, your lender uses a sector-specific Beacon score from Equifax, you can request this report as well. It may cost you a few extra dollars, but it's likely worth the peace of mind.
Keep in mind that in most cases, the de-duplication period for credit inquiries is 45 days. This means that if you request multiple credit reports while shopping around, you can avoid taking hard hits to your credit if you complete your inquires within that 45-day period.
Depending on what you find, getting a better score and a better interest rate on your mortgage could be as simple as switching to a lender who uses a different credit bureau. More importantly, though, understanding where your credit score is coming from early on in the house-hunting process could help you take the appropriate steps to optimize your score for the mortgage you want.
If you have healthy credit, you shouldn't have problems anywhere, but if you have concerns about your score, the discrepancies between what your lender sees and what you're seeing are certainly worth exploring because they could have a major impact on the type of mortgage you're offered – or denied.
My advice is to start by talking to your mortgage broker, who will be able to help clarify what goes into your credit score.