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.
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.
It is the difference in scores, however, that drives Al Bingham up a wall.
Bingham is the author of "The Road to 850 — Proven Strategies for Increasing Your Credit Scores" and, as a loan officer, says he has seen the harm the "free" credit scores have caused.
"The scores are not just off a few points," he says, "they can be off by 100 points, although they are usually off by an average of 30 to 40 points. But even one point off can cost thousands of dollars on a mortgage or auto loan."
Bingham says he pulled FICO credit scores and the three agencies' "educational" credit scores for one client. Looking at information from TransUnion, the Experian PLUS score was 71 points higher than the FICO score, Equifax's score was 66 points higher and TransUnion's own Transrisk was 79 points higher.
"I've seen them off 125 points," Bingham says. "What benefit does that give the consumer? Tell me how that can be educational. It is misinformation."
The CFPB released a study in September 2012 that analyzed 200,000 credit files from the three agencies. They compared the FICO scores actually used by lenders with the educational scores put out by the credit agencies and found that that different scoring models would keep consumers in the same credit-quality category 73-80 percent of the time. The scores, however, would place about one in every five consumers off by one category in credit-quality (19-24 percent). Between 1 percent and 3 percent of the time consumers would be placed in categories that were two or more categories apart.
"Consumers cannot know ahead of time whether the scores they purchase will closely track or vary moderately or significantly from a score sold to creditors," the CFPB report says. "It is likely that the credit score will not be the same as the score used by a particular lender or other commercial credit report user in making a lending or other score-based decision with respect to that consumer."
Like Bingham, VanderToolen doesn't see the benefit to buying or subscribing to the agencies' individual credit scores instead of using the FICO score. "Why buy something the lender is not using," he says, "when the only thing a credit score is used for is lending purposes?"
Bingham and VanderToolen point out that people can purchase the FICO score used by lenders at MyFICO.com, but that consumers can only get two of the agency scores and not all three. The FICO model also may not be the same used by a particular bank, since there are several different models banks may use and the FICO scores for auto loans or credit cards are different from the scores used for mortgages. VanderToolen, however, says it is as close as you can get.
But even the FICO site tries to get consumers to sign up for a monthly monitoring service — something VanderToolen says is probably not necessary for most people. "The average person only needs to look three to six months before a major purchase to make sure where the score is," he says.
That amount of time would give a consumer time to clear up problems to get the government-enabled free annual credit report (not score) from the three agencies via AnnualCreditReport.com.
This knowing ahead of the status of a credit report and the all-important credit score is where the harm can come in with a false score. The CFPB says if an educational score is too high, a consumer may apply for credit lines that would not be approved — wasting time and money. Applying for and getting rejected may also ding a credit score. A consumer may also have been able to do something about their credit score earlier before they might be locked into buying a home.
A false low score may lead a consumer to not apply for needed credit to get a home or car. They may also go to less favorable lenders. They also may take unneeded steps to improve their credit score.
When VanderToolen counsels people who ran into these credit score discrepancies, he tries to educate them about the differences between the scores lenders actually use and the scores his clients bought online. He can't understand why people may find them useful, but he does think he knows why the scores are being sold. "There is a billion dollar industry making a lot of money selling those three digits."
July 11, 2013 correction:
An earlier version of this article said credit scores may be used by employers in making hiring decisions. This is an error. Credit scores are not used for this purpose. Employers use different reports from the credit reporting agencies. So while working to improve a credit score would likely have an impact on the credit reports employers look at, the the three digit credit scores are not part of the information used by employers.
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