On July 19th the newly formed Consumer Financial Protection Bureau submitted a report to Congress that studied the credit-scoring marketplace. The goal of their study was to inventory the credit scores marketed to consumers as opposed to those credit scores sold to lenders, and then identify any areas where consumers could possibly be “harmed” by the practice. The study revealed what many of us already knew, which is the consumer market is flooded with credit scores that have little or no influence on your ability to get credit.
The selling of credit related products and services to you and me has become big business, really big business. The market for these products and services started evolving in the very late 1990’s (thanks to the Internet) and blew up in the middle part of this decade. Now we have a dozen or so companies who dominate the airways with advertisements for credit scores and credit monitoring services. Have you ever wondered why?
Credit Reports Are Free…for a credit bureau anyway
Credit reports have almost no “cost of goods”, which means they cost practically nothing to produce. It’s not like they require metal, glass, wiring, wood, machinery, or rubber to create. And, there’s no labor to deliver them. It’s 100% automated. The credit reporting agencies don’t have to go pay someone for a credit report in order to re-sell it to you. They already own the data and new data is continually being given to them for free by their network of data furnishers (lenders and collection agencies).
“Educational” Credit Scoring Models Are Cheap to Build
Building a credit-scoring model (one that is not going to be sold to lenders) can be done by a decent credit score developer during his lunch break, which means it costs basically nothing to build. Yet, you can run credit data through that model hundreds of thousands of times each day and produce a score that can be called a “credit score” in marketing advertisements. And since consumers aren’t hyper-sophisticated on the topic of credit scores it’s not a surprise that they are confused about credit score.
This confusion was identified by the CFPB as one of areas where consumers could be harmed by industry practices. “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.”
In my mind the consumer would also probably be a little more than irritated if/when they found out that what they’re paying for isn’t really what lenders are seeing. The CFPB agreed, “…the consumer would have spent money on a score or subscribed to a credit monitoring service that he or she otherwise might not have purchased. Believing he or she purchased a FICO score may lead to dissatisfaction upon learning otherwise.”
The Most Substantial Problem with “Educational” Credit Scores
The CFPB identified what they believed to be the most substantial problem with buying an educational score as being misrepresentation. Not misrepresentation in marketing language but a misrepresentation of the consumer’s actual credit risk. “The most substantial harm would likely result if, after purchasing a score, a consumer has a different impression of his or her creditworthiness than a lender would.
Essentially what this means is if you buy a score online somewhere and that score tells you that you’re a “750” you might walk into a lender’s office with the expectation of being treated like someone with FICO 750. However, if the lender pulls your legitimate FICO score and sees a 698, then you’re not going to be treated like a 750. That’s a scenario that has no winners. The consumer is either embarrassed or might even think the lender is being dishonest.
This can cut both ways. You get your score online and think you’re a 698 but your lender pulls your FICO score and sees a 750. In that case the news you’ll receive from the lender, hopefully, will be great, “John you’ve been approved at our best rate.” Still, this better outcome is still sub-optimal because you might be seeking credit from a sub-prime lender who can’t match a mainstream bank’s best offers.
That brings us back to the CFPB report on credit scoring. The report found that “When a consumer purchases a credit score from a CRA (Credit Reporting Agency), he or she will often receive a score that will not be the same score used by a lender to evaluate the consumer’s creditworthiness.”
What’s the take away? The take away is that we as buyers need to be aware that what we’re buying isn’t what Bank of America, Chase and Wells Fargo are buying when we’re applying for loans. As long as you are comfortable knowing that then no harm no foul and this CFPB report isn’t overly meaningful to you.
If, however, you want the same exact score “brand” the majority of your lenders are using then your options are limited to the products on FICO’s consumer website, myFICO.com and one of the products on Equifax’s consumer website, Equifax.com. But even then, it’s probably not the same exact FICO score that your lender is using.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.