I spend a lot of time talking about whether or not the free credit scores from CreditKarma, or the WalletHub free credit scores, or the credit scores from Credit Sesame are “real credit scores” or not. The reality is that most of the time, it doesn’t actually matter. If it’s a Tuesday afternoon and you are sitting on your porch with a cold one, it is irrelevant whether your credit score is 714 or 723 or 815. The only time it matters, is when you are actually getting a loan.
An interesting situation this weekend has shown me that even those real credit scores aren’t really real.
Real Credit Scores
When most people talk about a “real” credit score, they mean a FICO score. Most lenders rely upon FICO scores to make a decision about lending or what interest rate you get. The catch is that there are numerous kinds of FICO scores ranging from those used to judge creditworthiness for credit cards, a different one for car loans, and another still for mortgages. Beyond that, there are three major credit bureaus and all three of them can yield a different score depending upon what has been reported to each company. In other words, your real credit score can be many different numbers at any given time.
Here is where it gets really weird.
As a former financial planner, I still have people reach out to me from time to time about financial matters. Usually, I’ve seen it before, and I’m happy to help, but this time was a little different.
The person was applying for a certain kind of loan. For the purposes of this loan, you get the best possible terms with a credit score over 735. They pulled two different credit reports, and as I mentioned above they did have two different numbers. One was 736, and one was 733.
In this particular case, they go with the lower score, so just 2 points short of the best range.
As it turns out this person has a Citibank rewards credit card that they use to buy everything during the month. When the bill comes, it gets paid in full and they never pay any interest. So, the points get racked up, but no interest is paid. This is smart.
However, depending upon when Citibank reports the current balance to the credit reporting bureaus, the balance could be very low (just after being paid off), or very high (just before getting paid off). In this case, a balance of just over $5,000 had been reported. It was projected that if he had a balance below $300, then that would increase his score by 4 points.
Here is where this is ridiculous. This person has $30,000 in savings, and a non-retirement brokerage account nearing $200,000. Paying off the card is a trivial matter, which anyone could see by looking at both the history of the card (no late payments, no interest payments) and the cash available. But, that isn’t how credit reports work.
So, sure enough, he logged on to the website, paid the card to zero, and called back the lender who requested a printout of the screen showing the new low balance.
The 736 is now his low score, and he gets the best terms for his loan.
All because of this new REAL credit score.
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