Consumers buy the wrong credit scores, new agency warns

July 19, 2011

At least some of the millions and millions of dollars that consumers shell out to buy their credit scores could be misspent, and possibly even damaging, the Consumer Financial Protection Bureau suggested in a report released today.

Consumers spend more than $1 billion a year buying credit reports and credit scores from credit rating agencies or other online scoring sites, the study said.

But “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,” said the report, released two days before CFPB’s official launch as an agency. “It is important to note that many of the credit scores sold to lenders are not offered for sale to consumers.”

The downside of that? Besides wasting money on the wrong score, a consumer could make costly financial choices based on bad information. For example, if the consumer thought her credit was better than the lender did, she might spend time and money applying for loans for which she doesn’t qualify. If she thought her credit score was worse, she might not try for the best credit card or mortgage, thinking she wouldn’t qualify for it.

Some of that problem may go away soon. Beginning on July 21, lenders will be required to share the credit scores they use with consumers who get turned down for credit. But that won’t really help consumers who want to review (and possibly improve) their credit scores in the months leading up to a big credit application.

For them, there’s some takeaway from the CFPB report, as follows:

— If you’re going to buy a score, buy one that lenders actually use. The most commonly used credit scores are the FICO scores (available at myfico.com), but even the score you purchase there can differ from the one a particular lender is using, because there are different FICO score models, says the CFPB report.

— Credit reporting agencies make a lot of money selling scores to consumers. “Sales to consumers make up roughly a quarter of the U.S. revenues of the… (credit reporting agencies) and their affiliates,” the report said. “The market for providing credit reports and scores has grown in recent years to more than $1 billion in revenue.

Yikes! Remember that you can still get your credit report (the actual history used to calculate the score) for free at annualcreditreport.com.

— It’s not clear how educational those “educational” scores actually are. There are many places online where consumers can pay for so-called “educational” scores. These are often third-party scores that are either not used by lenders at all, or only used infrequently, said the CFPB. While an educational score may give you some idea of where you rank in the world of credit, it may be of limited value in assessing exactly how your intended lender would score you.

How off are they? And how much harm does that cause consumers?  Not sure, says the CFPB. That’s a subject for a whole other study, which the agency says it will be doing next.

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