The CFPB reviewed 200,000 credit files from the three major credit bureaus — TransUnion, Equifax, and Experian — and had each bureau provide five different credit scores for each file: the “educational” score that most consumers can purchase through credit bureaus; a generic FICO score that some bureaus make available to consumers; the number from VantageScore, a product created by the three bureaus to compete with FICO; an auto loan-specific FICO score; and finally a BankCard-specific FICO score. These last two are generally only available to lenders and not available for purchase by consumers.
According to the study, even though the different models pump out differing numbers, for a majority of U.S. consumers, the end result is the same — a good score from one scoring model consumer likely means a good score on another model.
But there is also a “substantial minority” for whom these differences can have an impact.
Because of the differences in which the scores are calculated, the CFPB says that around one out of five consumers are likely to receive a “meaningfully different” score than what a creditor would see. This means that the “consumer would be likely to qualify for different credit offers — either better or worse — than they would expect to get based on the score they purchased.”
For consumers who are misled into thinking they have a better credit score than they actually do, they may apply for loans or credit they can not qualify for. This is a waste of everyone’s time. They might also reject offers of credit that are in line with their actual level of risk.
On the flip side, consumers who are given credit scores lower than what lenders will see may be signing up for loans and lines of credit intended for someone with a lower score. This likely means higher interest rates, which is good for the lender but bad for the consumer. Such people may also needlessly pay for services targeted at people with poor credit scores.
The CFPB points out that a consumer’s awareness of their credit score can be a double-edged sword, writing that “the potential for a consumer to be confused may be greater where the consumer is sophisticated about the use of credit scores by creditors.”
For example, many people who read this site know that Fannie Mae generally will not purchase a loan if the borrower has a FICO score of 620 or below. But what if someone who has purchased a score from one of the three bureaus incorrectly believes they have a score of 620 when in actuality the score that lenders will see is 640?
Writes the CFPB:
If a consumer believes incorrectly that he falls above or below a crucial threshold then the impact of a given difference between scores may be magnified, since it may be more likely to have an impact on the consumer’s perceptions and consequent credit-seeking behavior.
“This study highlights the complexities consumers face in the credit scoring market,” said CFPB Director Richard Cordray. “When consumers buy a credit score, they should be aware that a lender may be using a very different score in making a credit decision.”
To that end, the Bureau recommends the following to consumers:
Shop around for credit. Consumers benefit by shopping for credit. Regardless of the scores different lenders use, they may offer different loan terms because they operate different risk models or face different competitive pressures. Consumers should not rule out of seeking lower priced credit because of assumptions they make about their credit score. While some consumers are reluctant to shop for credit out of fear that they will harm their credit score, that negative impact may be overblown. Inquiries generally do not result in a large reduction in a consumer credit score.
Check the credit report for accuracy and dispute errors. Credit scores are calculated based on information in a consumer’s credit file. Inaccurate information may be the difference between a consumer being approved or denied a loan. Before shopping for major credit items, the Bureau recommends that consumers review their credit files for inaccuracies. Each of the nationwide credit bureaus is required by law to provide credit reports for free to consumers who request them once every 12 months.
Starting on Sept. 30, the CFPB will have supervisory authority over the around 30 consumer reporting agencies that represent about 94% of the industry’s business. As such, it will be looking to verify that consumer reporting companies are complying with federal consumer financial law, including that the companies are using and providing accurate information, handling consumer disputes, making disclosures available, and preventing fraud and identity theft.
You can read the PDF of the entire report HERE.