Reuters Money

Consumers may think they know all about credit scores, but they don’t, a key advocacy group has found.

“The bad news is that consumer knowledge has lagged behind recent changes in the credit score marketplace,” Stephen Brobeck, executive director of the Consumer Federation of America, told reporters on Monday, Feb. 28.  The Consumer Federation joined with VantageScore Solutions, a credit scoring company, to survey consumers’ current knowledge about credit scoring. On average, consumers scored a barely passing 60 percent.

Lenders, landlords, employers and insurance companies all use these automated scoring systems to assess the riskiness of their potential customers, so having a low credit score can cost you an apartment, an insurance policy, a mortgage loan, or several thousands of dollars in higher interest costs.  But the whole credit-scoring scene has been changing, because of better technology, more competition, and a punishing economic slowdown that has affected the scores of many, if not most borrowers.

The consumers  surveyed were largely unaware of just how much a bad score could cost them. For example, a borrower with a bad credit score could end up paying more than $5,000 in extra interest on a $20,000, 5-year car loan, according to the survey. Want to test your own knowledge? Check out the survey, posted on a new site, CreditScoreQuiz.org.

Here’s what you should know about credit scores now:

There are lots of credit scores.

A credit score is created when an algorithm is applied to the data in your credit file. With three major credit reporting companies — Experian, TransUnion and Equifax – all keeping customer files, and more than one scoring company providing algorithms, that’s a lot of scores right there. On top of that, lenders and other end users often buy or develop their own specialized algorithms to assess their customers.

Sigh. Which one to watch? The 600-pound gorilla remains FICO, the original credit scoring company and the one relied upon by ab0ut 75 percent of all mortgage lenders. But VantageScore is challenging FICO; it was developed by the three credit-monitoring firms and it’s not hard to see a future in which those firms price their data in such a way that more users start using VantageScores.

The vast variety of scores means that you can’t just look at the number, says Brobeck. Different scoring companies use different scales. The FICO credit score ranges between 300 and 850. The VantageScore score ranges from 501-990.  “The most important fact about your credit score is not its level but its relation to other scores from that source,”  Brobeck said.

You still can’t get everything for free.

If you want to see your FICO scores, you have to pay for them. It will cost $20 at MyFico.com.  Some other websites offer these scores for “free” but they typically require you to sign up for potentially costly credit-monitoring services to get the free peek. You can sign up and cancel before the costs kick in, suggests Brobeck, but that’s not optimal. You can get free scores, including your VantageScore, based on the data in your TransUnion file, at CreditKarma.com.

Because of the Dodd-Frank financial reform legislation, lenders will be required to give some customers free copies of their credit scores starting in July. The new rule requires that if a lender turns down a customer or charges her more because of a credit score, the lender has to explain that and forward the score to the customer. But that still doesn’t mean that most customers will get copies of their scores.

You can get one copy of each of your three credit reports for free every year. That may be more important than your score — if the items in your report are wrong, they’ll be used to produce erroneous scores. Get your credit report at AnnualCreditReport.com, the free site set up by the credit bureaus in response to federal rules.

Scores are on the move.

Some new numbers are finding their way into scores. Some of them, for example, count rent payments now. That’s a boon to young consumers who may not have thick enough credit files to produce a solid score; if they pay their rent on time every month it can help them up their scores.

And the economy itself has had an effect on how scores are calculated and on how consumers actually score. VantageScore is looking more closely at recent credit activity, and putting less weight on how big any one loan is,  said Sarah Davies, a senior vice president with the firm. It is putting more weight on a consumer’s total debt.

Consumer credit scores are bifurcating, with those who have bad scores seeing their scores fall further and solid-score consumers seeing their scores rise, said Barrett Burns, president of VantageScore Solutions. He expects to see roughly 11 million consumers with better scores over the near future and 11 million consumers with score deterioration.