Your Credit Score Might Not Be As High As You Think

Very recently a combination of factors lined up to make refinancing our mortgage a smart financial decision for us.  A year-end bonus and our house appreciating meant it was time to look into dropping Private Mortgage Insurance (PMI), as discussed here, plus interest rates are about half a percent lower than when we got the mortgage in the first place, so locking in a lower rate for the next 20+ years could save us tens of thousands over the course of the loan.  Unfortunately, we had each signed up for a bunch of credit cards in the past several months and conventional churning wisdom recommends holding off for at least 6 months before applying for a major loan!  Should we keep paying PMI and higher interest rates to let our credit reports cool down, simply try to remove PMI from our current loan, or throw caution to the wind and apply for the refinance anyway?  As the only risk of applying for the refinance is a hard credit pull, we decided to go for it despite each having 3 new credit cards between us in the past 60 days and a bunch more further back.  I’ll break down what impact the new accounts had on our credit scores (more than we expected!), how that impacted our rates, and why we’re going ahead with the refinance anyway below.

Credit Score Tracking

When I first started looking into rewards credit cards and big signup bonuses a year and a half ago, tracking and maintaining our credit scores was at the front of my mind.  The holy credit score was the ticket into big adult purchases like homes and cars after all, as well as a key factor in determining your ability to get more credit cards.  Starting out, I used a few free tools to start tracking my credit score and began meticulously recording my score over time to see what kind of impact all of these new credit cards would have.  Much to my delight, regardless of how many cards I got the scores seemed to continue going up.  It would drop 5-10 points every so often when I got a couple new credit cards, but would be even higher than it started a couple months later when I applied for the next.  Overall the trend was heavily favoring an upward trajectory.

Fast forward to a week or so ago when we started looking at refinancing our mortgage and we’d have to actually use our credit scores for something other than new credit cards for once.  A combination of year-end bonuses, rising property values, and lower interest rates made this an ideal month for us to refinance.  Not only would we be able to get rid of PMI once and for all, but would also be able to lock in a lower interest rate and cut potentially hundreds of dollars off of our monthly payment.  Talk about a win-win.  While browsing for rates, I plugged in a FICO score estimate of 740+ (which was the highest category) based on our monthly FICO score updates from Discover and Amex and found the company with the lowest rate and closing cost combination that worked for us.  Much to our surprise, when they made the hard pulls on our credit to lock in the rate, our credit score was much lower than anticipated!  What happened?

FICO vs. FICO vs. FAKO

There are a lot of different ways to retrieve your “credit score” from various places such as banks, credit cards, and free online websites but unfortunately they only give one score out of many different possible algorithms that generate them.  You’ve probably heard FICO vs. FAKO used to describe an “actual” FICO score (like the free one offered by Discover) versus estimated FAKO scores offered by websites like Credit Karma, but did you know that “FICO” itself doesn’t actually connect to a specific scoring algorithm?  Instead, it really just encapsulates the overall brand of credit scores generated by the Fair Issac Corporation.

One FICO score may give you a value 100+ points off of a different FICO score simply due to the way they are calculated, even though both are legitimate “FICO” scores using the exact same credit information.  This is particularly true when comparing scores used for different purposes.  For example, there are more specialized credit scores specifically for auto loans or mortgages and they each favor certain credit factors more heavily than others such as those used for credit cards.  Overall, there’s really no way to know for sure what your credit score will be for any particular lender which is why I strongly suggest you never pay anyone for a “credit score”.  It won’t be any more accurate than the free estimate websites you find online such as Credit Karma and Quizzle.

The myFICO website has more information on the different types of FICO scores and why they exist: FICO® Score versions

As it turns out, the “FAKO” scores that I’ve seen many people write off were actually more accurate for Becky and I than the “FICO” scores provided by Discover and Amex as far as refinancing a mortgage is concerned.

What I Expected My Score To Be

NOTE: I’m displaying my credit scores below, but for all intents and purposes you can look at them as both Becky and I’s.  Our credit profiles are almost identical and aside from a few points up and down on various reports, all of the conclusions apply to both of us.

As I mentioned above, I do a fairly good job of tracking my credit score whenever it’s provided to me.  Discover, Barclay, and Amex each provide a monthly (usually…) FICO score update, or more specifically, they provide a FICO Score 8 based on TransUnion and Experian data respectively.  Based on these numbers, it definitely looked like we should qualify for the best possible interest rates:

discover_score
Free FICO Score 8 based on TransUnion data provided by Discover

 

Free FICO 8 Score provided by Amex
Free FICO 8 Score based on Experian data provided by Amex

Based on the two FICO 8 scores provided by Discover and Amex (based on TransUnion and Experian data) my credit score should fall somewhere in the 740 range.  On the other hand, the various credit score estimate sites all pegged me a little bit lower with their VantageScore 3.0 model.  Here’s an explanation on VantageScore from Quizzle’s website:

The VantageScore credit score was launched as a joint effort by the three major credit reporting companies (Equifax, Experian and TransUnion). Today, the VantageScore credit score is used by thousands of lenders, including the nation’s largest banks, in their credit card, auto lending and mortgage businesses.

credit_karma_scores
Free Credit Scores provided by Credit Karma

 

According to Credit Karma (and Mint and Quizzle), my actual score was in the high 600s instead of the mid-700s.  Kind of a big difference, but up until this point I always put more weight on the FICO score over the FAKO VantageScore so I thought I’d be good to go for the refinance.

What My Score Actually Was (For the Purpose of Refinancing That Is)

During the rate shopping process where they simply asked for a credit score estimate to quote a rate, I always put 740+ but was told anything above 720 should get the same rates.  Once we settled on a provider and actually applied for the refinance, I was surprised to find out that my score was actually closer to the Credit Karma FAKO scores above!

The actual scores pulled were the following and I did get a copy of the reports during the process:

  • Equifax: 705 (FICO Classic V5 scoring model)
  • TransUnion: 680 (FICO Classic V4 scoring model)
  • Experian: 698 (FICO V2 scoring model)

Overall, they each came in a little lower than expected, and I definitely learned not to discount the “FAKO” VantageScore when trying to determine what a real pull of my credit might end up like.

Comparing to Pre-Churning Credit Scores

Getting my credit pulled for the refinance gives me a good opportunity to see what’s really happened to my credit since starting the rewards credit card game about 18 months ago.  We got the initial mortgage about 21 months ago and still have the credit reports from that hard pull for comparison.  At that time, we each had a single credit card from a small credit union and it was only open for about a year or so at that time.  Other than that, our credit reports were basically empty.  The scores pulled back then should be a good comparison to the ones pulled recently due to them both being for a mortgage-based loan, but unfortunately they didn’t list what scoring model they used:

  • Equifax: 726
  • TransUnion: 704
  • Experian: 741

There you have it folks, the real impact of opening up 23 new credit cards in the past couple years has been about a ~30 point average drop across each credit bureau!  Definitely a larger impact than I thought, but certainly not detrimental in any way.  As time goes on, my score will eventually bounce up to the 800 range if I take it easy on credit card applications because recent inquiries will go down and average age of accounts will slowly get bigger and bigger.  Even if I do keep signing up for cards as the same rate, the AAoA will get bigger as well, but just not as fast.

Impact On The Refinance Rate

The scores themselves aren’t exactly meaningful as what really matters is how the bank considers them and how their terms change based on the score.  In our case, we were bumped from the top-tier interest rate to the next level down which resulted in a 0.125% increase in the rate on the loan.  Closing costs and everything else remained exactly the same, so it’s really easy to calculate exactly what the impact was to our finances.

  • Increase in Interest Rate: 0.125%
  • Increase in Monthly Payment: $23
  • Annual Difference: $276
  • Difference Over Lifetime of the Loan (30 years): $8,280

Once we had the option to officially lock in the rate, there was a couple things to consider.  First, simply removing the PMI would start to immediately save us ~$150 per month alone.  Second, the lower interest rate compared to our initial loan (even with the extra 0.125%) saves us another $200/month on our payments.  Third, there was no guarantee the interest rates would remain the same or go down by the time we settled down the new credit cards and waited for our scores to fully recover.  Plus, waiting introduces somewhat of a guessing game into when we should apply again.  Would 3 months be enough?  What about 6? Should we wait a full year?  Or more?

Anyway, the immediate savings of ~$350 per month was more than enough reason to go through with the refinance and we will make up the closing costs with those savings in less than a year.  We locked it in and are going through the closing process right now, I’m optimistic everything will finish out smoothly.

Worth It?

Absolutely!  Even if given the option of going back and laying off credit card applications for the past 6 months to a year, I probably still would have done the exact same thing even knowing it would cost me an extra $23/month on the new loan.  Keep in mind, while the $8,280 in extra interest payments seems a little scary, it’s spaced out over 30 years and only actually applies if we take the full 30 years to pay it off!  The chances of us being in this house 10 years from now are pretty slim, although it’s always possible we’ll keep it as a rental property when we move on.  Regardless, we might just continue to make the same payments we are now and let that extra ~$350 per month go towards the principal to speed up paying it off and save us a bit in interest.

To add a little context to why I think signing up for all of those cards was worth it, over the past 18 months or so Becky and I have opened up 37 new credit cards and received ~1.4 million miles/points, numerous free hotel nights, and a couple thousand dollars in cash (about half of which was offset by annual fees) just from signup bonuses!  I hate to put values on points, but a conservative estimate would put the total value over $20,000!  We will have to slow down eventually (or at least adjust our strategy), but at the moment we seem to be able to accumulate over $1,000 per month towards travel thanks to the credit cards we sign up for.

Previously, it was hard to put a “price” on exactly what this credit card behavior was costing us long term, but for now that price appears to be about $23 per month going forward.  Still worth it.

What About You?

Credit scores are a fickle beast and it’s hard to say exactly what the impact of you doing something similar to us would have on your credit.  We started from a very short and limited credit history, so anyone more established at the start would probably be better off.  If you’re already in the 800’s, I can’t imagine any number of credit cards that would knock you back down to the 600’s (as long as you pay them all on time and in full!).  Aside from that, simply going at a slower pace than us would probably reduce the impact on your credit score.

Let’s also not forget that credit score isn’t the only factor that goes into your ability to get big loans.  Income, assets, and outstanding debts are all major considerations by the banks issuing the loans outside of the credit scores discussed above.

All I can provide is my own experience, but hopefully you learned something.  The biggest takeaway for me was probably that “FICO” vs “FAKO” probably isn’t that important and you should consider both when trying to piece together what your effective credit might be.

If you’re interested what credit factors went into all of my scores above, here’s a good view from Credit Karma:

credit_karma_factors

Did I scare anybody into slowing down their credit card churning, or did all of this anecdotal evidence convince you to go harder?  The decision is ultimately yours, but I’ve convinced myself that it’s not time to start walking away from that sweet sweet travel anytime soon.  Cheers!


34 thoughts on “Your Credit Score Might Not Be As High As You Think

  1. Looks like the age of credit history probably had the biggest impact. 11 months?! Without lenders knowing what you do, you’re a substantial risk to them 😛

    1. Definitely! The Average Age of Accounts is much lower than ideal. Creditors can see your oldest line of credit as well (~3 years for me), which is also taken into account (at from what I’ve heard).

      Even if I opened a moderate one card per year since my first card ever, my AAoA would still only be ~1.5 years! That’s just a byproduct of being young, but also the reason I made a strategic decision to hit applications hard initially. I knew my credit would remain less than ideal for some time, but after 5 or so years, my report should look really strong thanks the several no annual fee cards I’ve opened plus all of the accounts (even closed ones) continuing to bump up my AAoA. Future cards will have a smaller and smaller negative impact on my AAoA and overall credit score as time goes on, so I’m not worried. 🙂

  2. Hi Noah, I recently got a new mortgage for a home purchase. This was my second house, but my first since starting the hobby of miles and points collecting. In my case, the interest rate I received was the same regardless of my credit score. Where you pay more money is this: If your credit score is below 720 you have to pay upfront points to secure the lowest interest rate. For example with wells fargo I would have to pay 1.5% points up front to get the days interest rate. On a $300,000 home that is $4500. Second, PMI rates are higher depending on your credit score.

    1. Some lenders offer the points option to match up to the rate, but not all of them and not in the same way. We did have the option to buy a lower interest rate via points, but it wasn’t the same 0.125% amount that the credit score dinged us. The points and interest rates offered would have taken over 10 years to get that upfront cost back in saved interest so we decided to pass.

      PMI being higher for worse credit score definitely makes sense as it’s insurance protecting the lender in the case you aren’t able to pay back the loan. Luckily, we’ll be done with PMI after the refinance process finishes, but that’s good info for anyone considering a loan that will involve it.

      Thanks for the info!

    1. Thanks! Age is definitely a factor just in the amount of time it takes to build up AAoA. Responsible credit handling over time is what the lenders are looking for though, so I can’t be too upset with the process. One day, I’ll have a couple decades of on-time payments to set a solid base for any credit score algorithm

  3. I think you are 100% right about age and length of credit history. I am in my mid-fifties and it takes a LOT to move my credit score too much. I started this hobby about 18 months ago as well. About a year in, I unexpectedly needed to apply for a large mortgage for a beach condo. I ultimately lost the bidding war, but the 350k loan was approved. I think it helped that I was up front with the lender and told him exactly what I was doing. I explained how cc churning works, told him about my trips, and more than anything he was impressed with the management of so many cards.

    1. Yeah, even through our refinance process so far no one seems to care that we have a lot of credit cards (recent or not), they just have to go through the motions of evaluating based on a credit score along with debts and income. Definitely a good sign for anyone who was worried about how a person might view their churning-heavy credit report, but every lender is different.

      1. As a conventional mtg underwriter at one of the largest banks, credit card churning itself is really a non issue for the approval. Its more so the possible affects from it. You’ve hit it on the head in this article with credit score affect but that’s going to affect the pricing, not necessarily the approval (assuming it doesn’t go THAT low) and like you and others have noted, over time your score will only go up with responsible credit card churning. So realistically most seasoned credit card churners will see better pricing than the average applicant. Also, the difference in pricing typically is minimal after 720. The risk is if you ever get sloppy and miss a payment or leave a high balance at statement cut date and your utilization ratios/payments are high. MO deposits into an asset account trying to be used to qualify could be a headache and a lot of work since large deposits need to be sourced. Keep those separate. Inquiries aren’t even that big of a deal for the approval process. Those are reviewed to ensure no payments/balances are missing from liabilities on application. Not to trim out churners. Good luck with the refi!

        1. Thanks for all the tips! Coming from the position of an underwriter means you probably have a lot more insight than us looking from the outside can provide.

          The name of the game seems to be responsible handling of your lines of credit, churning or not.

  4. Noah,

    Good write up. I also am in the process of refinance and the exact same thing happened to me. I have about 12 credit cards apps in the last year and one round of apps about 4 months before applying for refinance. My credit score from Discover, Amex, etc was all between 805-785. The mortgage lender pulled from the 3 bureaus and took the middle score to offer the rate. They were 782, 749, and 732. Two things surprised me, first that it was so much lower than what I had assumed from the ones the credit cards show you, second was the 50 point spread between the 3 agencies. Per my mortgage lender score needs to be 760 plus for the best rates so we got an 8th of a percent added on as well. It does add about 30 dollars a month to our mortgage. We took another hit when our appraisal came back way lower than we expected (18k lower than an appraisal last year when took out a Heloc). Overall it has not been as good as deal as I hoped. We are still going through because the rate is still a little lower, we convert from variable to fixed rate and also get rid of the higher rate HELOC by combining it with the mortgage. Also we had to pay the $450 for the appraisal and figured we already started may as well finish.

    I do agree that the value I have gotten from the miles and points from opening up credit cards is easily worth $7680 I will pay over the life of the loan assuming we don’t refinance, sell or whatever. I think we have already gotten that much value in the trips we have taken. In two weeks our family of 5 is going to Maui for a week on points and miles! I would happily pay 33 dollars a month to get the huge discount on these types of trips.

    I do think if I would have waited another two months it may have been better, but you live and learn. Good blog btw

    Cheers

    1. Thanks for reading! Sounds like you went through an almost identical process as us. 760 is higher than I was quoted for the best rates, but I’m sure that varies by location and lender. Looks like you same to the same conclusion that the credit cards rewards were worth it despite the slightly higher interest rate. Live and learn for sure!

  5. If anyone wants to monitor the FICO scores that are most commonly used for mortgages, they are included in the reports you purchase from the myFICO website. It’s a bit pricey though.

    As mentioned in the post above, these are the FICO scores that are commonly used for mortgages:
    Equifax – FICO Classic V5 scoring model
    TransUnion – FICO Classic V4 scoring model
    Experian – FICO V2 scoring model

    The FICO score 08 that most credit card companies give you for free is the FICO score most commonly used for credit card applications. I can’t think of anyone who currently uses that score for mortgages.

    So the takeaway is to be aware of which score will be used in the lending decision that is in your future.

    1. I’m still in favor of never paying to find out your credit score when many free approximations exist, but it’s good to know that it’s available in the situation someone really needs to know the exact number.

      I wonder how “common” the scores you listed out above are for mortgage lending. 90% of lenders? 75%? 99%? I doubt the VantageScore people are lying about “…used by thousands of lenders, including the nation’s largest banks, in their credit card, auto lending and mortgage business”, but it’s entirely possible the usage is limited to a certain region or something similar. The myFico website does specifically list them as the “Versions used in mortgage lending”, so I would imagine it does apply to the majority.

      I agree with your takeaway, if you can find out ahead of time exactly what score will be used it might help you make a better decision of whether or not to approve the hard pull.

  6. ” Overall, there’s really no way to know for sure what your credit score will be for any particular lender which is why I strongly suggest you never pay anyone for a “credit score”. It won’t be any more accurate than the free estimate websites you find online such as Credit Karma and Quizzle.”

    I’m sorry, but this is both bad advice and dead wrong. Had you ponied up $30/month (for as little as even one month) for FICO Ultimate 3B then you could have received 19 different FICO scores including all three that were actually used for your refi. Simply adding “what FICO score do you use” to the list of questions you ask potential lenders, then comparing to your MyFICO report would have allowed you to know exactly what score each lender would pull before they pulled it.

    1. I stand by my statement that you should never fork over money to find out your credit score, but you are correct that it’s possible to know before the lender pulls it IF you know (or are able to find out) exactly what scoring model they use and have access to the same score yourself.

      Even the FICO Ultimate 3B package only gives quarterly updates (despite the monthly fee), so any time between the most recent report and the mortgage/refinance application could result in a different score showing up (although probably not much different in most cases).

  7. “Your Credit Score Might Not Be As High As You Think”
    I think you are missing the point–the bank that pulled your FICO score is entirely different from the FICO/FAKO scores provided by your credit card companies. So, I’m not certain why you would say that “your credit score might not be as high as you think.” It’s as high as the scoring model used to score you. A more appropriate title of our article should be “You Have Many Credit Scores; Just Know Which Scoring Model Is Used By Your Creditor.”

    1. The title was aimed at reports I’ve seen online like “Amex says I have a 770, so I could get any loan I wanted” which seem to ignore that different calculations exist for different types of loans (and lenders).

      The title applies perfectly to my own situation though which is what I was trying to share. I expected my credit score to be 720+ and ended up closer to 700, so “my credit score wasn’t as high as I thought”. Of course the actual credit score depends on the algorithm used which was the conclusion I came to.

  8. “There you have it folks, the real impact of opening up 23 new credit cards in the past couple years has been about a ~30 point average drop across each credit bureau!”

    Don’t discount the timely payments made to your new mortgage loan that’s on your credit report. Mortgages do make a big difference.

    1. That’s a good point that I failed to mention in the article. Having ~20 months of on-time mortgage payments certainly helped as much (if not more) than any of the credit cards I had at the same time. Considering that I’ve had the mortgage longer than my average age of accounts along with it adding “variety” to my lines of credit, it was definitely a positive overall factor.

  9. Curious if you applied through SoFi in addition to more traditional bank/CUs? I see a lot of feedback regarding their student loan refis, but not much in terms of mortgage/mortgage refis.

    1. I did not apply through SoFi, but did end up going with an online mortgage company. I’ll provide more details on that once I get through the closing process.

  10. Had a completely opposite experience.

    FICO Classic v8 scores from Amex (EX), (~720) Barclay (TU), BoA (TU) (~725) (in my case they update ~15 apart) were very close to the FICO EF V5 (717), TU V4 (725), EX V2 (706) pulled by lender.

    VantageScore v3.0 scores from Karma (TU, EF), Sesame (TU), Quizzle (TU) were all in 800+ territory – loony numbers compared to what the reality of mortgage-specific FICO were.

    The biggest contributor in my case was the 1 derrogatory record on each of EX, EF, TU. It was a frivolous wrongful billing by a local (soviet-style) utility company in a tiny amount ~$100 that I was fighting with them about for last several years. After seeing that that single record was the cause of my much higher lending costs, paid it off with provision that collection deletes it from EX, EF, TU.

    A month after deletion my EF V5, TU V4, EX V2 jumped on average by about 50 points each. Average is 770+ but the FACO VantageScore v3.0 is still 30+ points higher on Karma, Sesame, Quizzle. The Classic v8s on Amex, Barclay, BofA are in between (a few points under 800) the “old-school” EF V5, TU V4, EX V2 lending-specific scores, and VantageScore v3.0.

    The biggest divergence for VantageScore 3.0 (explained here – https://www.creditkarma.com/article/VantageScore-3-0 ) is that it ignores settled (but still on record) collections. The “thin file” filler is the second biggest divergence factor, where it amplifies more recent good history with scores higher than Classic FICO (v8 or earlier).

    Classic V8 (as can be seen under Amex, Barclay, BofA) is still a little higher (~20 points on average) then the lending V2-V5 range.

    You can approximate, but until you pull, it’s a guessing game.

    1. Thanks for sharing your data points, that’s a lot of good information for anyone who might have a derogatory mark and want to know the impact of potentially clearing it. Sounds like your credit is pretty solid no matter what score someone might pull these days

  11. I always thought the credit score model was flawed. When the real estate bank crash in 2008 many people defaulted that previously would be considered good credit risks. Others saw that their house was worth less than the mortgage and wanted out. They heard housing values only go up. Sort of like running a business and f you are not making money and deciding not to pay your bills and walk away. My idea which is pretty off the wall was some sort of character predictive model. It is my belief that all scores are not created equal. So the credit agencies may assign a 700 to various people. My take is there may be a difference in those 700 score holders. When things get tough certain people will just default, while others will do what it takes to not default. Its a crazy idea but I saw plenty of people in the business world that under any adversity just folded up shop. Companies bigger than me. The way naks do this is they band credit scores and losses are based on those credit score blocks.

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