An article in the July 2013 issue of Consumer Reports magazine (“Don’t Buy Useless Credit Scores”) highlighted the differences between the credit scores purchased by consumers and those used by lenders.
According to the authors, consumers typically purchase their FICO credit scores with the assumption it is the same one lenders use when considering them for a loan. But that may not be the case, after all.
Consumer Reports Calls FICO Product ‘Inferior’
FICO credit scores were created in 1958 by a company called Fair Isaac. FICO is actually an acronym for the Fair Isaac Corporation, the company’s original name. This company often accuses its competitors of using “FAKO” credit scores – that is, scores that are different from the ones used by lenders in their credit-making decisions.
However, according to Consumer Reports, the FICO credit scores that are sold to consumers for around $20 a piece can also differ from the scores used by creditors and lenders (including mortgage lenders). Is the crow calling the raven black? Having reviewed the scoring information that FICO typically provides to lenders, Consumer Reports researchers went so far as calling the scores consumers can buy “inferior.”
If the consumer group has its way, we could eventually have free access to the same credit scores lenders use when considering us for car loans, mortgages and other types of financing. In March of this year, new legislation was proposed that would require the “free annual disclosure of scores that lenders actually use.” This legislation was introduced by Sen. Bernie Sanders (I-Vt.) and endorsed by Consumers Union, the parent company of Consumer Reports magazine.
Under the current system, consumers do not have access to the scores given to lenders. If it becomes law, the new legislation would change the status quo and usher in a new era of transparency.
CFPB: Consumers Should Not Rely on Credit Scores
In the fall of 2012, the Consumer Financial Protection Bureau (CFPB) – a financial watchdog agency created by the Dodd-Frank Act – examined the differences between the credit scores given to consumers and those used by lenders. The CFPB concluded that “consumers should not rely on credit scores” as a way of getting inside the minds of lenders.
The CFPB found that consumer and lender credit scores are often significantly different. In 20% to 32% of the cases they examined, reporting data was scored differently depending on the end product. In fact, the differences were so great that in some cases “the scores were one or more credit-quality categories removed from each other.”
The CFPB pointed out that “consumers can’t know ahead of time whether the scores they purchase will closely track, or vary moderately to significantly, from a score sold to creditors.” If that is the case, consumer credit scores would seem to warrant the “useless” label assigned by Consumer Reports.
The Increasingly Complex World Of Credit Scores
The further you dig into the credit scoring industry, the more complicated and convoluted it becomes. The study conducted by the Consumer Financial Protection Bureau last year considered five different scoring systems, some of which have become outdated. According to Steve Wagner, president of the Experian credit-reporting bureau, there are actually “hundreds of different scores.”
What’s a consumer to do or think? When you encounter a website that offers to sell you your FICO credit score, it all seems straightforward and simple. They typically claim the score you are buying is the one used by lenders when making decisions about you. But, as we have learned, this is not always the case. If these companies were more frank and candid about the incredibly convoluted world of credit scoring, consumers would probably be less likely to buy their scores. It’s a lack of transparency, to say the least.
It is the Home Buying Institute’s position that credit scoring, as a whole, needs a major overhaul. The current system is needlessly complex and suffers from a serious lack of transparency. If consumer financial information is collected and later used by lenders to make credit decisions, it should be made available to consumers.
Current federal laws require the three credit-reporting bureaus (Experian, TransUnion and Equifax) to provide free reports to consumers once per calendar year. But there is no such law for credit scores – unless the aforementioned legislation is passed into law.
The Consumer Reports article concludes by pointing out Fair Isaac (FICO) currently sells 49 different FICO score products to mortgage lenders and other creditors. But a subsidiary of this company, myFICO.com, only offers consumers two of those scoring products. The authors liken this to “handing someone a Diet Coke and calling it Classic.”