An ongoing challenge for a credit-scoring enthusiast is trying to figure out why a credit score at one consumer reporting agency (CRA) is different from a credit score at another, all things being equal. Sure, most of us who follow this stuff know that the credit reports differ at least slightly from bureau to bureau, and that some creditors don’t report to all three CRAs. But some of these differences are just too big — often as much as 50 points — and the standard answers too inadequate to simply leave it at that.
One factor to consider when trying to understand a major score discrepancy is the vintage of the scoring model being used, as many scoring changes have taken place over the past 20+ years, and with versions dating back to the 1990s still very much in use today. And there is no better example of how the use of different scoring versions contributes to major score discrepancies than a look at how home equity lines of credit (HELOC) have impacted credit scores.
A HELOC is an open credit line available to a homeowner that is used like a credit card, where the balance can be paid in full or paid in smaller monthly payments over time, and a mortgage, where the debt is typically a high dollar amount and is secured by real estate. HELOCs typically show up on credit reports as “revolving” type credit, like credit cards, though they tend to behave more like mortgages than cards in terms of the risk they present to lenders.
When HELOCs first burst onto the scene along with the real estate bubble of the 1990s, credit scores didn’t quite know what to make of their presence on a credit report and were unable to make any real distinction between a HELOC and any other type of revolving credit, e.g. credit or retail card. The including of HELOCs in many of the revolving calculations led to many consumers being hurt by lower FICO scores resulting from (what looked to the score like) HELOCs with high “credit utilization” — the balance/limit ratio calculations that account for almost 30% of a credit score. Including HELOCs in credit utilization turned out to be one of the hazards of having HELOCs looked at in the same light as credit cards and other types of revolving accounts.
To remedy this situation early on, some work-arounds were made to the existing scoring formulas, while plans were being made to incorporate more precise changes to future versions. The first changes consisted of effectively removing HELOCs from all revolving credit utilization calculations by excluding any “high” limit or balance revolving accounts. The idea here was that a typical HELOC would have a much higher limit and balance than the typical credit card, which would cause most to be excluded from revolving calculations. Still, however, there remained cases where a HELOC would fail to be excluded through this rule and consumers saw their scores tumble as a result.
Fortunately, the more-recent versions of the scores have done a much better job of identifying HELOCs when reviewing the credit report, by treating these accounts more like mortgages than credit cards. But the story doesn’t quite end here, as lenders continue to use many of the old scoring versions along with the newer ones, continuing to keep credit-scoring enthusiasts busy trying to figure out why one FICO score is so much higher or lower than the others.
Image: Stefano A, via Flickr