Do you really know your credit score?

Jeff Tyler Jul 22, 2011

Do you really know your credit score?

Jeff Tyler Jul 22, 2011

Tess Vigeland: So Suze Orman herself doesn’t think Fair Isaac’s credit scores are fair. And there’s one more piece of evidence to that this week. The new Consumer Financial Protection Bureau issued a report on credit scores this week. And — quite maddeningly — it turns out that the number you think you have isn’t necessarily the one businesses are using to decide whether to lend to you.

Marketplace’s Jeff Tyler has the details.

Jeff Tyler: There’s a popular misconception about credit scores, the idea that each person has one single score. In fact, most of us have multiple credit scores and the variety can work against us.

Raj Date is with the brand new Consumer Financial Protection Bureau. He helped put together last week’s Congressional report on credit scores.

Raj Date: What the study finds is that, in general, the scores that consumers receive when they buy or otherwise receive a score are typically not the scores that lenders actually use in their decision-making processes.

Here’s an example: Alexander Colon is a retiree living in Mohegan Lake, N.Y. He’s been diligent about reviewing his credit reports from all three credit bureaus — Equifax, Experian and TransUnion. He believed his score was excellent.

Alexander Colon: It’s like 95 percent perfect. I had one late fee. One time.

But when he refinanced his mortgage, his bank assigned him a surprisingly low credit score. He ended up with a more expensive loan than he’d expected.

Colon: My monthly rate was $200 or $300 more than I wanted to pay.

There are a number of reasons for the inconsistency in credit scores. Small banks often don’t shares their data with all three credit bureaus. Or they don’t share data at the same time. Or, most important, different companies use different credit algorithms. As a result, one person can have multiple credit scores. They can vary from one industry to the next. In fact, there’s even variation in credit scores that originate from a single company.

Take the industry standard, the Fair Isaac Corporation’s FICO score. Norma Garcia is an attorney with Consumers Union. She says buying your score from FICO doesn’t necessarily mean it will match the score used by lenders.

Norma Garcia: There are variations in what lenders can do with the information they receive from FICO, so they might apply their own proprietary model to analyzing that data that could again leave the consumer in the dark.

The credit bureaus have come up with their own system for credit scores, called Vantage. And other financial companies sell competing products too.

Again, Raj Date with the Consumer Financial Protection Bureau.

Date: Many consumers, when they get their free credit report, also pay for a score at the same time. So there are a lot of different channels by which consumers actually get scores and it’s a surprisingly big business today. It’s roughly a billion dollars in revenues a year.

Is that money well spent? Norma Garcia with Consumers Union isn’t so sure.

Garcia: If this information isn’t really being considered by those making decisions about whether a consumer gets a loan, then what value is it? And who’s really making the money here? Who’s really benefiting? Is it the consumer or the credit reporting bureau?

There is some good news. Last week, new rules went into effect making credit reports more transparent. If you apply for a credit card or a car loan, and you get denied or you get offered less than favorable rates, the lender is required to share the credit score on which the decision was based.

Finally, the consumer will see the exact credit score used by the lender. Too bad it’s after the fact.

I’m Jeff Tyler for Marketplace Money.

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