DID YOU KNOW: Many lenders use multiple scores to assess credit risk?

Date: June 22, 2020

When consumers apply for credit, and for mortgage loans in particular, many lenders assess the risk of doing business with those consumers by accessing one or more of their credit reports. At the same time they pull credit reports, they also pull credit scores, numeric representations of the consumers’ credit risk.

It’s true that consumers’ credit scores are a key component to the lender’s decision-making process, but it might surprise you to learn that many lenders use multiple credit scores to provide a more refined assessment of risk.

For example, in the mortgage-lending environment, it is common practice for a lender to look at credit scores from all three major credit reporting companies (CRCs): Equifax, Experian, and TransUnion. And if you are applying for a mortgage with a co-borrower, the co-borrower’s three credit reports and three credit scores will also be accessed. That process yields six credit reports and six credit scores.

Each mortgage lender then uses any of a variety of methods to evaluate the combination of scores. For example, some lenders use the middle score for each applicant to determine their risk. So, if an applicant’s scores are 674, 690, and 714, 690 will be the score used for risk assessment. Drawing on multiple scores is a conservative method for determining rates and other loan terms.

One of the ways the VantageScore model is different is that scores are more consistent because the same model is deployed at each CRC, whereas other models are built specifically for each of the three CRCs, resulting in score variation.

It is also important to know that many large lenders use custom scoring models built by in-house statisticians or external third parties. It’s extremely common for custom-developed scoring systems to use credit bureau-based risk scores as an “input.” This means your 725, for example, is fed into another scoring model and influences what ends up being your “custom” risk score.