Your credit score is important. Consumers pay a lot of money each year to obtain their credit scores from credit reporting agencies. But the score you receive may not be the same one a lender uses when determining whether to grant you a loan or not.
In fact, it probably is not, according to the new Consumer Financial Protection Bureau (CFPB), which officially began its mission last week. In a report issued as one of its first items of business, it said that credit scores provided to consumers are often "educational scores" that may differ significantly that those lenders use in making loans.
So how do you know what your credit score actually is? One of the first things to keep in mind is that there is no single "credit score" for anyone. Each of the three major credit reporting agencies - Experian, Equifax and Transunion - generate their own credit scores based on the information they have about an individual consumer and may use several different scoring systems that produce a variety of scores. Major lenders may also produce their own credit scores for an individual, based on information from a credit reporting agency and data obtained from other sources.
Does your score accurately reflect your credit?
However, when consumers order their credit reports, they expect it to be a fair representation of how lenders view their credit. The CFPB is concerned that the practice of providing different credit scores to consumers and lenders is potentially harmful to consumers.
The CFPB is concerned that the credit scores provided to consumers may not always provide an accurate picture of how a lender would view their credit. If the credit score that would be provided to a lender is worse than a consumer was led to believe, they might waste time and money applying for mortgages or other loans they might not be able to qualify for. If their credit is better than they were led to believe, on the other hand, they might not purse a needed loan at all, or could end up paying higher rates and fees than they needed to.
Another thing is that consumers spend a lot of money on credit scores. The CFPB estimates that consumers account for roughly one quarter of the $1 billion in annual fees that credit reporting agencies generate from selling credit reports. If those scores aren't an accurate reflection of how a lender would view their credit, consumers aren't getting what they paid for.
Proprietary score or FICO?
So why don't credit reporting companies just provide consumers with the same scores they give lenders? Wouldn't that be simpler? Well, for one thing, there's a financial consideration. Credit reporting companies have to pay a licensing fee every time they release a FICO score, which is the credit score typically demanded by lenders. By generating an "educational" score that is similar, yet different, from the FICO, they don't have to pay that fee.
Each of the credit reporting agencies has its own proprietary credit scoring system that produces a score roughly similar to the 300-850 point range used by FICO - the Equifax Credit Score, Experian Plus Score and Transunion Transrisk New Account Score. However, the three agencies also collaborated to produce a new scoring system, called VantageScore, which uses a scale from 501-990 - so that a borrower's numerical score reported under that system would likely be significantly higher than their score would be under the FICO system.
Consumers can purchase their actual Equifax and Transunion FICO credit scores, but need to take some care to make sure that's what they're ordering. An Equifax FICO score can be purchased directly from the company, but a Transunion FICO score must be ordered through the MyFico.com web site of the Fair Isaac company, which developed the scoring system.
Consumers cannot purchase the Experian FICO score, as the company does not currently have a licensing agreement with Fair Isaac for selling FICO scores to consumers. However, there are ways of obtaining your Experian FICO score, as well as from the other credit reporting agencies, for free.
Obtaining a free credit score
Unlike credit reports, which consumers may obtain free of charge once per year from each of the three credit reporting agencies, credit scores typically must be purchased. However, there are certain circumstances under which the law states you must be provided your score free of charge. These include 1) when you apply for a mortgage, 2) when a lender provides credit involving risk-based pricing (i.e., rates or fees that vary according to credit score) or 3) when a lender denies credit or alters the terms of credit based on a credit score.
In each of those cases, the lender must provide the credit score used to evaluate the borrower and the source of the score.
It should be noted that the CFPB hasn't concluded that the practice of providing consumers with different credit scores than those given to lenders is actually harmful to consumers, but has only concluded that the potential is there. The actual impact is to be evaluated in a second report to be issued at a later date.