By Stephen Fennell
As a mortgage lender, we deal with credit all the time, but we also know the system can be extremely confusing for many clients we work with. The rise of credit checking systems has enabled the average consumer to keep a finger on the pulse of their scores, but at what cost? Are these systems reliable, and what are their drawbacks? This week, we dig into what you probably don’t know about free credit check sites, and how it could impact your finances and mortgage.
1) Free credit check sites show scores that are not your credit score
First, it’s important to understand that free credit check sites show what’s called a Vantage score, something distinctly different from a FICO score. Vantage scores are a model created for consumers to view their credit health, but they’re not actually being utilized by banks. The model doesn’t record FICO scores that require a longer account history before reporting, so they’re viewed as not robust enough to make a determination based upon. The vantage scores are often directionally consistent but not the actual FICO score you need for anything lending related.
2) There are many, many different versions of the scores coming from the three credit agencies.
Your FICO scores are generated by the three credit agencies- Transunion, Experian, and Equifax- but there are actually over 60 different versions, each providing a different score. Banks often use two of those versions to determine mortgage eligibility scores. Likewise, cellphone, auto, or insurance companies use a different version entirely to measure risk in their industries. These versions are FICO scores developed for specific industries to measure the risk of providing credit, so free credit checks simply don’t capture all of the different variables.
3) Vantage scores exist only to be consumer-facing
Free credit check sites have found their niche by making credit scores easy for the consumer to understand, but actual FICO scores were initially developed to serve lenders and statisticians almost exclusively. The average Joe simply wasn’t the original audience, meaning the whole system can be very confusing to consumers. Free credit check sites have found a way to make them readable for everyone but at the cost of accuracy. Think of them as a thermometer only capable of accurately telling your temperature in ten-degree increments. The credit bureaus largely don’t care if their scores are readable to you, so when making lending decisions to buy a home, it’s only your FICO score that counts.
4) These sites make money from selling recommendations based upon your credit profile
As with anything, free credit score websites have to make money in order to keep their services running. Industry insiders argue that when their company sees opportunities to save money, they present them to consumers for consideration. While most reputable sites don’t sell consumer information for profit, they do sell access to the opportunity to offer deals to them, meaning product recommendations are not always the best you could qualify for. There’s nothing sinister about free credit check sites making such recommendations, but it’s important to remember to should shop around and not take their word for it. Keep that in mind for our next point in particular.
5) Free credit check sites are slowly branching into the mortgage industry, and you may be paying the price
In 2018, Credit Karma acquired the mortgage platform Approved, a means of building out technological integration of their current mortgage brokerage service offerings. The push to break into mortgages has been a focus of Credit Karma since around 2016-2017 and is likely meant to capitalize on a millennial audience growing older and more capable of buying a house within the next several years. Likewise, other sites in the industry are pivoting in an attempt to do the same. One downside to the business model of selling access, at least when it comes to mortgages, is that consumers have reported calculations of payments that are wildly off-base. Mortgage calculators on these sites often don’t factor estimates of basic things like property taxes, homeowners insurance, mortgage insurance, or HOA fees, or closing costs into their calculations. Misleading cost estimates, coupled with potentially non-competitive market offerings, can lead to a loan costing vastly more than if a consumer had consulted an offline expert. Having a lower estimate feels good at first, so free credit check sites can reel consumers in with these estimates. Like most things in life though, the check comes at the end, so be careful with where you put your trust.
This weekly Sponsored Column is Produced by Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain Mortgage today.
Stephen Fennell NMLS ID: 387618