Millions of consumers buy their credit scores so they can know where they stand credit-wise.
But the scores that are sold to consumers may vary, in some cases wildly, from those sold to and used by lenders. That difference could give consumers a false sense of credit bravado, or it could make them think that they are a worse credit risk than they really are. We may soon find out the impact on the differences between consumer- and creditor-purchases scores.
The Dodd-Frank financial reform act required the Consumer Financial Protection Bureau to examine the scoring variations. The bureau has just released a preliminary report that provides a good explanation of why different scoring models may produce different scores for the same consumer and how the differences may put a consumer at a disadvantage. The big study of whether consumers are being hurt by different scores is about to begin.
“This is exactly what the CFPB was set up to do,” said Travis Plunkett, legislative director for the Consumer Federation of America.
Prompted by the new consumer watchdog agency, the three credit bureaus — Experian, TransUnion and Equifax — have each agreed to construct a random sample of 200,000 consumer reports from their databases, in consultation with CFPB staff. For each report, the bureaus will include the scores that are sold to consumers and several of the scores that are most widely sold to lenders. All personally identifiable information will be removed.
The detailed credit-history information in the reports will make it possible to explore whether differences in scores across various scoring models are more likely to affect consumers with different credit-history features.
“This data will help us analyze the nature, range, and size of the differences between the credit scores consumers and lenders receive,” said Corey Stone, author of the report and CFPB’s assistant director for credit information markets. “This analysis will help shed light on the potential harms to consumers that these differences may create.”
The credit-score-selling business is booming. The U.S. market has grown in recent years, to more than $1 billion in annual revenue from consumers purchasing reports and scores, according to the CFPB. The agency says sales to consumers make up roughly a quarter of the revenue of the credit-reporting agencies and their affiliates.
“One way consumers have tried to empower themselves is by knowing their credit scores,” said Elizabeth Warren, special adviser to the secretary of the Treasury on the CFPB. “We are assessing whether purchasing a credit score provides a consumer with the information he or she needs.”
Credit bureaus generate scores from the data in the credit files and then provide those scores to creditors, who include the information in decisions on whether to grant credit and on what terms. Credit scores are intended to show whether a consumer is more or less likely to repay a debt relative to other consumers.
The scoring model most often used by lenders is FICO, the proprietary brand created by the Fair Isaac Corp. But even FICO has different versions of its scoring model. Each credit bureau has its own proprietary scoring models. In a joint venture, the three credit bureaus developed yet another model. There are also companies that will generate a credit score for educational purposes, selling to people a score that attempts to approximate a FICO but is only intended to help consumers figure out how to improve their credit history.
There are so many scoring models that there’s a joke that consumers are unwittingly purchasing “fake-co” scores, Plunkett said.
“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,” the CFPB report said. “The scarcity of public educational tools to inform consumers of the differences among credit scores, the large combined market share and brand recognition of FICO scores, and the marketing practices of some credit-score sellers, may all perpetuate such confusion.”
You have to know the limitations of the scores you are buying, the CFPB says. If you think too highly of your creditworthiness when in fact you have some problems, you might not make changes that would result in a better loan. If you mistakenly think your score is not good, you may settle for less favorable terms or may forgo applying for credit if the scores you purchase lead you to believe you will be viewed as a poor credit risk.
It’s important the CFPB probe this issue. What people don’t know could be costing them money.
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