Most consumers know the importance of tracking their credit score to ensure they get the best terms when applying for credit cards, mortgages or other loan products.
However, according to a new report by the Consumer Financial Protection Bureau (CFPB), tracking your credit score in the current credit scoring environment may be easier said than done.
That’s because the complexities of credit reporting — and the multitude of credit scores available — make it difficult for consumers to get an accurate picture of their credit situation, says the CFPB.
“A consumer, unaware of the variety of credit scores available in the marketplace, may purchase a score believing it to be his or her ‘true’ (or only) credit score, when in fact there is no such single score,” said the CFPB in the report. This can be a problem for consumers because, the CFPB notes, they “cannot know exactly how a creditor will view them.”
According to the CFPB, differences in credit scores is one of the biggest drawbacks to the current credit scoring environment. Consumers could obtain a copy of their credit score thinking that it accurately reflects their credit risk and find out later that the lender that they applied for a loan with saw a different score.
“We’ve been trying to educate people about this for years,” says Kim McGriggs, Community and Media Relations Manager at Money Management International. “A lot of people don’t realize that they don’t have just one credit score. Consequently, many assume that the credit scoring range is 300 to 850, and if they are above 680, it’s a good score, because that’s what FICO uses.”
What causes the differences in scores
There are three main reasons why a lender might see a different score than a consumer:
1. Credit scoring models vary widely. There are many different ways to calculate a person’s credit score, and different scoring models use different credit scores with different score ranges. As a result, a credit score of 720 can mean widely different things — depending on which scoring system is used. Not only do the different credit rating agencies, Experian, Equifax and TransUnion, use their own proprietary scoring model, banks and even credit monitoring services often have their own credit scoring system as well.
2. Credit rating agencies don’t always use the same information. The three credit rating agencies don’t always have the same information about a particular consumer on file, and, as a result, they may be using different information to score consumers.
For example, not all banks file data with all three credit rating bureaus, and sometimes information is provided on different schedules. Tracking can also be complicated. For example, when a consumer changes names, not all three agencies may have picked up the change, and so that can also cause differing information among the credit rating agencies. Banks themselves may also collect information, which impacts the bank’s own proprietary credit scores.
3. Consumers may obtain different types of scores than lenders. Most mortgage applications are evaluated using FICO scores, which range between 300 and 850. However, when consumers get a copy of their credit score, they are generally offered the proprietary credit score of the credit rating bureau or credit monitoring service they are dealing with. While these scoring models originally were developed to predict a consumer’s performance on credit obligations, they are currently sold primarily as “educational scores” for consumers.
Purchased credit scores more likely to differ from what lenders see
Each year, an estimated 15.9 million consumers pull a free copy of their credit report at annualcreditreport.com, according to the Consumer Data Industry Association. Among these consumers, an estimated 4.2 million also purchase a copy of their credit score. Other consumers obtain their credit scores by signing up for a credit monitoring service.
Unfortunately, the CFPB report states, in both cases, these are the scores most likely to differ from what the lenders see. By using their proprietary credit scores, credit rating agencies or credit monitoring services avoid paying licensing fees to a third party, such as FICO. However, as the CFPB points out, the proprietary credit score won’t necessarily tell consumers how lenders will view them.
“Many of those credit scores available for purchase are not widely used by lenders,” the report notes. “And because there are so many different credit scores available, when a consumer buys a score, it’s quite likely that the lender will use a different score.”
On the other hand, the report notes, in circumstances where lenders are required to give consumers a copy of their credit score as part of a credit application process, the consumer is much more likely to receive the score used by the lender.
This is good news for consumers, since recently released regulations from the Federal Reserve require lenders to give credit applicants free access to their credit score if they are turned down for credit or are offered a less favorable interest rate based on their credit score.