The secret scores that run your life

Published: Tuesday, July 9 2013 10:00 a.m. MDT



Secret scores may determine where you can live, what job you will work at and what car you drive. If your numbers are just one digit in the wrong direction, you may spend thousands of dollars more on your home mortgage or car loan.

Will VanderToolen, a financial counselor at AAA Fair Credit in Salt Lake City, almost daily sees people who are angry about their credit scores. He says these people purchase credit scores online to see how well they are doing. Then, when they go to get a mortgage, the lender tells them they have a completely different credit score. "People come in and are very upset because they think they are getting scammed," VanderToolen says. "I have to tell them, the credit score they got on the Internet is not the same credit score. They didn't look at the fine print."

With so many different "free" credit scores available online, many people assume these numbers are the same as those used by lenders. They are not — and the differences between the real credit scores and online credit scores can mean the loss of thousands of dollars to consumers.

Credit reporting

Knowing the varying risk of borrowers is valuable to lenders who can adjust interest rates and access to loans accordingly. To learn this risk, creditors send borrowers' information to the three big credit reporting agencies: Equifax, Experian and TransUnion. According to the Consumer Financial Protection Bureau, these three agencies each have more than 200 million files on consumers. A bank, for example, could report on the status of payments on a customer's car loan, mortgage loan or credit cards.

All this information is compiled into each consumer's credit report. Each agency has one for each consumer. The data reported to each agency are not exactly the same.

All theses data points are run through various formulas to create a three-digit credit score. The most common way of calculating the credit score is through Fair Isaac Corporation or FICO. FICO scores are used, according to the CFPB, by 90 percent of the firms making lending decisions. The FICO model uses a range between 300 and 850.

Where a person rates using the FICO model can make a big difference. Score levels of 620, 680 and 740 could be set up as boundaries to decide if a borrower is a "subprime, "near-prime" or "prime" credit risk. Fannie Mae, for example, generally won't consider buying mortgages with FICO scores under 620.8.

It isn't any wonder, with so much hanging on these numbers, that consumers want to know their credit scores to make good decisions about mortgages, car loans and other credit opportunities.

Scores the lenders do not use

The three credit reporting agencies know about this need and cater to it. Each offers its own credit score product — usually tied to a monthly credit score monitoring service. Equifax offers its "Equifax Credit Score." Experian offers the "Experian Plus Score." TransUnion has its "TransRisk New Account Score." The agencies also have a joint venture that produces the "VantageScore."

Experian's score is found at FreeCreditScore.com, where the score is free if people sign up for a trial subscription to a monthly monitoring service. Becky Frost, senior manager of consumer education for freecreditscore.com, says the score is "a user-friendly credit score model developed by Experian to help you see and understand how lenders view your credit worthiness. It is not used by lenders, but it is indicative of your overall credit risk."

The website describes it as "for educational purposes."

Frost says there are many different credit scores. "Lenders and insurers use several different credit scoring models so don't be surprised if your lender gives you a score that's different from the PLUS Score," she says.

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