Consumer Financial Protection Bureau Director Richard Cordray speaks during a a hearing in Denver... [+] where he discussed his agency's proposal on arbitration, in Denver, Colo., on Oct. 7, 2015. (AP Photo/Brennan Linsley)
There was some big news in the world of credit scores this week. The Consumer Financial Protection Bureauordered TransUnion and Equifax to pay more than $23 million in fines and restitutions "for deceiving consumers about the usefulness and actual cost of credit scores they sold to consumers." I've used these and the other credit scoring services described below extensively, and these services are advertisers on my personal finance blog, so I was particularly interested in the CFPB's orders.
The orders explained that the credit score models most often used by lenders are those developed by Fair Isaac Corporation. You may know these scores by their common name, FICO scores. In contrast, the scores offered by TransUnion and Equifax used proprietary scoring models, sometimes referred to as "educational credit scores." The name comes from the idea that these scores help educate consumers about their credit scores generally.
The problem, according to the CFPB, was that TransUnion and Equifax misled consumers by suggesting that the educational credit scoresthey offered were the same scores lenders used to make credit decisions. According to the CFPB, however, these scores were "rarely used by lenders to make credit decisions."
The orders offer a good opportunity to review credit scores, how they work, and which scores matter most.
Many Credit Scores
While it may surprise some, each consumer has multiple credit scores. There are several reasons why. First, most consumers have credit information at each of the three major credit bureaus--TransUnion, Equifax, and Experian. While the credit data should generally be the same from one credit bureau to the next, there are often minor differences. These differences can result in three different credit scores, even if the score is generated by the same credit scoring model.
Second, there are multiple credit scoring models. As the CFPB's orders show, for example, there are FICO scores and educational credit scores. Within each of these, there are even more variations.
For example, the CFPB's orders state that FICO alone has offered more than 60 different scoring models since 2011. They have industry-specific models, as well as regular updates to existing FICO score models.
Credit Scores and Lenders
Given the multitude of scoring models, how do we determine which score a specific lender will use? According to Fair Isaac, 90% of "top" U.S. lenders use FICO scores. While that helps narrow the field, remember that Fair Isaac has introduced more than 60 FICO scores since 2011. As Fair Isaac notes:
You have more than one FICO Score—depending on what type of credit you're seeking, your lenders may evaluate your credit risk using different FICO Score versions. Auto lenders, for instance, often use FICO® Auto Scores, an industry-specific FICO Score version that's been tailored to their needs. Most credit card issuers, on the other hand, use FICO® Bankcard Scores or FICO® Score 8.
It turns out that the most widely used FICO score is the FICO Score 8, according to Fair Isaac. That's true even though FICO Score 9 has been released. Fair Isaac goes on to provide the following advice:
- Financing a new car:FICO® Auto Scores, the industry specific scores used in the majority of auto financing-related credit evaluations.
- Getting a new credit card:FICO® Bankcard Scores or FICO® Score 8, the score versions used by many credit card issuers.
- Getting a mortgage: Base FICO® Score versions previous to FICO® Score 8, as these are the scores used in the majority of mortgage-related credit evaluations.
Related: How Your Credit Score Affects Your Mortgage Rates
With respect to mortgages, we can get a bit more specific.According to Fair Isaac's Tom Quinn, here are the three credit scores used by most lenders:
- Equifax Beacon 5.0
- Experian/Fair Isaac Risk Model V2SM
- TransUnion FICO Risk Score, Classic 04
Those are fancy names for FICO Scores 5, 2 and 4, respectively. You can find more details on how this works hereand listen to my interview with Tom Quinn here.
How Do We See Our FICO Score?
Now to the big question. How do we go about getting an advanced look at these scores before applying for a credit card, car loan, or mortgage? A casual reading of the CFPB's orders might lead one to believe that we can see the scores lenders use before applying for credit, so long as we avoid those "educational credit scores." Most of the time, however, you can't.
Fair Isaac, for example, will sell you access to your FICO scores through its site myfico.com. In fact, it will give you access to "28 of the most widely used FICO® Score versions," for a fee of course. There's no guarantee, however, that a lender will use one of these scores. And if you got access to them a few months before applying for credit, they will likely have changed by the time the lender reviews your application.
That's not to say seeing your FICO scores has no value. It does give you a general idea of where you stand. It can also let you know what's helping and what's hurting your score, ideal for those looking to improve their FICO score. But it's no guarantee that the score you see will be the exact score a lender sees.
Are Educational Scores Worthless?
And that brings us to the educational scores. Some of the more popular free credit score sites are Quizzle, Credit Karma, and Credit Sesame. Each offers an educational score based on different scoring models. Some are quick to dismiss these scores because they are not based one of the countless FICO models. I think the criticism is overdone for several reasons.
First, in my experience, these educational scores are close to scores based on the FICO model. I compared them using my own credit and found them to be comparable. Second, they do give you a general idea of where your credit stands. Third, the services do a good job of letting you know what is helping and what is hurting your score. And finally, they are totally free.
In the final analsysis, the key is to protect your score by making payments on time, keeping your credit utilization low, and applying for new credit only when you must. Checking your score with any of these services, whether a FICO or educational score, has the added benefit of giving you a rough idea of where you stand and what you can do to improve your score.
As an expert in personal finance and credit scoring, I've delved extensively into the intricacies of credit scores and the associated services mentioned in the article. Having a comprehensive understanding of the credit industry, I can confidently provide insights into the recent developments involving the Consumer Financial Protection Bureau (CFPB) and its orders against TransUnion and Equifax.
The CFPB's directives focus on the deceptive practices of TransUnion and Equifax in selling credit scores, particularly their "educational credit scores." These scores were presented to consumers as if they were the same as those used by lenders in making credit decisions. However, the CFPB revealed that these scores were rarely employed by lenders for such purposes.
The heart of the matter lies in the diversity of credit scoring models. Contrary to common perception, each consumer possesses multiple credit scores. This stems from the existence of credit information at each of the three major credit bureaus—TransUnion, Equifax, and Experian. Even with the same credit scoring model, minor differences in credit data between bureaus can result in distinct scores.
The article sheds light on the prevalence of various credit scoring models, with a spotlight on Fair Isaac Corporation's (FICO) scores. The CFPB's orders emphasize that FICO scores, especially the FICO Score 8, are predominantly used by lenders. However, the nuances lie in the fact that there are numerous FICO score versions tailored to different credit types, such as FICO Auto Scores for auto financing and FICO Bankcard Scores or FICO Score 8 for credit cards.
For mortgages, the article specifies the three credit scores commonly used by lenders: Equifax Beacon 5.0, Experian/Fair Isaac Risk Model V2SM, and TransUnion FICO Risk Score, Classic 04—essentially corresponding to FICO Scores 5, 2, and 4, respectively.
The article also addresses the question of how consumers can access their credit scores. It highlights that while Fair Isaac offers access to FICO scores through its site myfico.com, there is no guarantee that a lender will use one of these scores. Furthermore, the dynamic nature of credit scores means that scores obtained months before a credit application may differ from those reviewed by the lender.
Finally, the article touches upon the value of "educational scores" provided by free credit score sites like Quizzle, Credit Karma, and Credit Sesame. Despite criticisms that these scores are not based on FICO models, the article argues that they offer a close approximation and provide a general idea of one's credit standing. These services, whether FICO or educational scores, can be beneficial for understanding factors influencing the credit score and guiding individuals in improving their financial standing.
In essence, the key takeaway from the article is the importance of understanding the complexity of credit scoring, the variety of scoring models, and the need for consumers to be vigilant in protecting and improving their credit scores.
