The credit score is the primary factor in determining what rates the banks and mortgage lenders offer to consumers. So, is it a coincidence that errors on credit reports are helping to increase the bank’s profit margin on mortgage loans? Not to say that the banks are in bed with the credit agencies; “At least we hope they are not,” says Shahram Sondi, a consumer advocate at Florida Home Funding. However, this press release shows how errors on consumer credit reports are hurting the American consumer and resulting in more profits for the banks.
Here’s the scary part - recent numbers released by the federal trade commission show that one out of four Americans have errors on their credit report. This can affect their Equifax, Experian and Transunion credit scores. This is especially important due to the fact that most banks and mortgage lenders use the middle credit score of the mortgage applicants to determine credit worthiness and mortgage rates.
For example, if a consumers Transunion score is 760, their Experian is 700 and their Equifax is 720. The banks will determine that the credit score is 720, the middle score, instead of an average of the credit scores. Thus, if consumers have errors reported on two credit-reporting agencies it can negatively affect their ability to qualify for a loan and get the lowest mortgage rates. So, a consumer may be forced to monitor at least two credit reporting agencies, paying ridiculous monthly subscription fees to make sure that the same company that is charging them is not reporting errors. Consumers are paying credit reporting agencies so they can find the agency’s mistakes and try to fix them. In short, errors on the consumer’s credit report damage their credit score, and cause devastating impact on their financial well-being.
It’s bad enough that the credit scoring system is a mystery. Banks and mortgage lenders also price their mortgage rates based on credit score increments. Only a 1 point difference in credit score significantly becomes advantageous for the banks increased profit margin. For instance, a borrower with a credit score of 699 will be paying 0.5% more on an interest rate than one with a score of 700. Taking into account the adjustments for various credit scores when pricing a mortgage loan, there is a significant difference. For example, the median price in 2013 on existing homes in the US is around 200k. An average loan amount of 160k at a 20% down payment can result in an extra $50 per month, and an approximate extra 18k in finance charges over the life of the mortgage.
Just one point of difference in the consumers credit score in the right direction can save them lots of money or cost them money that they could be putting into a retirement account. Realistically, the fact that a consumer’s score can fluctuate by a few points on any given day, do they deserve to lose $18k on a “mystery number?”
About: I’m Shahram Sondi (NMLS 186790), owner and operator of Mortgage Expert, Inc, a Florida licensed mortgage broker. As a consumer advocate, I am constantly working to educate consumers on making good financial decisions.