When it comes to loans, determining the price is anything but easy. Market conditions, economic forecasts, and global affairs all play a role in determining a loan’s price. However, individual factors matter a great deal as well. A borrower’s current financial status, loan history, and credit score are vital for a lender to consider. For this reason, many lenders have relied upon the tri-merge credit report standard.
This standard means that lenders order 3 reports on a consumer from the 3 major credit bureaus, which are Experian, Equifax, and TransUnion. Once the information has been received from all 3, the lender is able to take the 3 credit scores and select the median, or middle one, for pricing purposes. This works well as it eliminates a large possibility that 1 bureau’s bias can artificially inflate or lower an individual’s credit score.
Recently, some lenders have attempted to use the bi-merge credit score instead, which sources information from only 2 of the 3 major credit bureaus. However, this reopens the door to credit score volatility and bias. In fact, over one-third of consumers saw a 10-point credit score difference when comparing bi-merge and tri-merge credit reports.
Furthermore, when only 2 credit bureaus are used, individuals can see different scores based on which 2 bureaus are used. This allows consumers to shop around until they find a credit score that benefits them, and that may not necessarily be accurate. This can result in them being placed in a better pricing bucket. On a $350,000 loan, this could cost anywhere between $3,000 to $5,000 for the lender.
Ultimately, having incomplete financial information is damaging to lenders and borrowers alike. In order to ensure that loans are being priced fairly for both parties and to eliminate shopping around, ordering a tri-merge credit report is the way to go.
Source: Equifax
