How Tri-Merge Reduces Credit Uncertainty
When someone decides it is time for a mortgage, lenders use several metrics about an individual to determine eligibility and reliability. They review a wide range of factors to judge the overall safety of the loan over time. This process helps to not only ensure investor trust but to also have an accurate snapshot of the applicant’s creditworthiness. For this reason, many professionals in this space consider the tri-merge credit report to be the best standard for assessing risk and determining borrower eligibility. n
The tri-merge approach uses credit information from all three major bureaus to determine different factors about the candidate, generally relying on the median score of the three. This creates a balanced and comprehensive view of financial behavior. In contrast, using only one bureau or even two, known as a bi-merge approach, can result in an incomplete or inconsistent profile. These gaps can influence not only whether a loan is approved, but also the interest rate and general terms of the loan. As a result, alternatives to tri-merge reporting are often viewed as less dependable and more susceptible to error than a system that incorporates all of the data into one snapshot.
Differences between credit bureau scores can be very significant, especially when one or several are omitted from a report. Research has found that leaving out just one report can change a borrower’s score by 10 points or more. Additionally, nearly 35% of consumers have score variations of at least 10 points between bureaus, 18% experience differences of 20 points or more and around 7% see gaps of 40 points or higher. These are serious discrepancies, as for borrowers in the mid-range of the credit spectrum, just a 20-point difference can shift them into a different pricing category. So many Americans fall into this range, putting them at risk for a lasting financial impact, potentially adding thousands of dollars over the time period of the mortgage.
“Score-shopping” is another issue that borrowers and lenders grapple with when it comes to credit determination. This phenomenon occurs when borrowers or lenders are selective when choosing which credit score to put forth, often choosing the most favorable score of the set. Although this strategy on the surface seems as if it would save money for individuals, it often only provides a short-term advantage. Looking at the bigger picture, it can lead to overall issues in the lending market, causing a miscalculation of risk and inflated scores. In response to these negative effects, lenders often respond by tightening standards, making it harder for all buyers across the country to qualify for future loans.
The fixed benchmark of a “700” credit score has been considered standard in the industry and acts as a dividing line for loan terms. However, these thresholds are more often than not a poor representation of individual circumstances. They do not address the inconsistencies that often exist across credit reports, and oversimplify the evaluation process. Most importantly, these universal standards do not best reflect each borrower’s financial standing across the board. This is why using the tri-merge method offers advantages for both borrowers and lenders, as it provides a more accurate representation of credit history, reduces the chance for manipulation and creates a more reliable system.
