Personal Debt Issues
Credit scores cloudy with a good chance of confusion
by Broderick Perkins
(7/27/2011) - The credit score you buy may not be the credit score your lender uses when you apply for credit.
Way. Too true. And the practice can cost you some serious cash.
One of the first reports out of the new Consumer Finance Protection Bureau (CFPB) is perhaps the first extensive report ever to examine in such detail the variety of credit scores, who sees which score and when.
If the new report "The Impact of Differences Between Consumer- and Creditor-Purchased Credit Scores," is any indication of what's to come from the CFPB, get on their emailing list, bookmark the website, ConsumerProtection.gov, and keep abreast of how you can still be duped, hoodwinked and misled by the world of financial services the bureau was created to police.
The report opens a tiny, previously blacked-out window into the world of consumer finance, where there always seems to be some "sound" corporate or proprietary reason to confuse the consumer. It's yet another glaring example of the transparency that doesn't exist in the vast world of consumer financial services.
What is a credit score?
A credit score is a numerical rendition of your credit report. The numerical summary of your creditworthiness, or lack thereof, reflects the relative likelihood that you will or won't default on your credit obligations.
Lenders widely use credit scores to make a decision about your application for most types of credit, including mortgages, auto loans, credit cards, personal loans and others. Credit scores are also used to make decisions about insurance, rental applications, even jobs.
Scores also determine if your creditor will raise or lower your credit limits, change your interest rate or cut you off from existing credit. High credit scores will also get you the best credit rates and terms, while low scores will make you pay more for credit -- if you can get it.
By federal law, credit scores are free under certain circumstances, typically after the fact, say, because a lender rejected your application.
You can also buy your credit scores. Note the plural. You have many.
"Consumers who are unaware of the variety of credit scores available in the marketplace may purchase a score believing it to be their 'true' (and perhaps, one and only) score. The most significant adverse impact on a consumer from score differences would likely occur if the credit scores the consumer buys give a substantially different impression of his or her credit risk than credit scores that a lender would use," the CFPB report says.
And there's a good chance the lender will use a different score.
Credit score jungle
There are numerous credit scores.
• The FICO score (300 to 850) is best known and most widely used by all three credit reporting agencies (CRAs), Equifax, Experian and TransUnion, especially for mortgage applications. However, FICO develops unique scoring models for use at each of the three CRAs because of differences in each CRA database, so each of your FICO scores could be different.
As well as mortgages, FICO also creates scoring models for credit cards and auto loans.
• CRAs, also each have their own proprietary credit scoring models. These scores, sold as "educational scores," are often the score you'll get when you purchase them from a CRA, according to the report. There's the "Equifax Credit Score," (280 to 850); the "Experian Plus Score," (330 to 830) and the "TransRisk New Account Score," (300 850).
They all come with their little quirks. For example, TransUnion's TransRisk score was developed to predict performance only on new credit accounts. TransUnion also uses the VantageScore.
• The VantageScore was created in a joint venture among the three CRAs. Unlike FICO, the VantageScore model is the same at all three CRAs, because it combines data from all three CRAs. Hold on. There are two VantageScore models in use, the original created in 2006 and an update available since January 2011. The VantageScore models produce scores from 501 to 990.
• Yet another score, a proprietary CreditXpert score, was developed for and is specifically sold to consumers through some online credit monitoring services operated by Affinion, Intersections and others. This is not a credit score per se, but a credit score for your credit score. That's right, it's not a prediction of credit performance, but a prediction of how you will be scored by other credit scoring models. Vertrue (Some combination of words, huh?), yet another outfit with a gang of online credit assistance services, also offers the VantageScore.
Doing the credit score $huffle
It gets worse.
The number of different scores alone, and how they are generated, is enough to cause you to buy a different score then the one the lender uses, but scores can also vary because credit report data can change from the time you purchase a score to the time when you actually apply for credit.
The report outlines the potential problems festering in the mish-mash of credit scores. They can all affect your pocketbook.
• Wasted money. The report says the scarcity of information about the variety of credit scores doesn't allow you to make objective decisions about buying credit monitoring services which often attempt to lure you with "free credit scores" attached to costly credit monitoring services. The services range in cost from $15 to $20 a month or more -- as much as $240 or more a year -- in perpetuity. Such services with or without a "free" credit score have been branded as everything from questionable to virtually useless by objective, independent research.
"In these circumstances, the consumer would have spent money on a score or subscribed to a credit monitoring service that he or she otherwise might not have purchased," the report said.
• Credit score ding. You could apply for loan for which you aren't qualified if you buy a score that turns out to be higher than the one used by your creditor. For some credit, applying and or being denied too many times can lower your credit score and come with application fees.
• More expensive credit. If you get a low-ball credit score, you could be motivated to shop lenders offering less than favorable terms, higher interest rates, more fees, etc. because you believe you won't qualify for a better deal. The lender certainly has no incentive to clear up your confusion. Lenders and brokers routinely steered consumers to more costly mortgages, contributing to the Great Recession, and they were paid handsomely for their efforts.
In a follow-up study, CFPB plans to obtain more credit score data from each of those who hawk them in an effort to compare the variations between those sold to consumers and those used by lenders. The agency hopes to offer a more detailed look at the harm that comes from not knowing the real score.
"To help educate consumers, the CFPB also plans to post advice on its website about how to obtain and maintain a good credit score."
There's a good chance CFPB has only seen the tip of the iceberg.
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