Misleading free credit scores

Are Free Credit Scores Misleading?

Are Free Credit Scores Misleading?

For several years, many websites have offered free credit scores. Understandably, credit scores have a significant impact on consumers’ spending choices, possibilities, and habits. A credit score is a calculated number that is based on the information found in a credit report. Lenders use this information to determine if an individual’s likelihood of repaying a loan. Because consumers have multiple places to get their credit score, it begs the question: are free credit scores misleading?

In January, credit bureaus were forced to pay millions of dollars in fines due to their poor marketing. They failed to effectively explain the types of credit scores they offer. Ultimately, consumers created and implemented financial plans based on a credit score that were not used by lenders. Each credit bureau vowed to be more specific in the future, but until then, it is up to the consumer to educate themselves on the types of scores they receive.

Credit card companies use free FICO scores to provide credit scores on cardholder’s statements. Other websites like Credit Karma and Credit Sesame claim to offer free credit scores for those who sign up through the company’s website. At first glance, a person may think it is a legitimate way to get their credit score for free. However, many people do not realize that companies and bureaus can offer free credit scores if they are considered “educational scores.” These education scores are not used for decide whether a consumer qualifies for a service

It is important to note that there is not a single credit score for anyone. Each credit bureau creates an individual credit score based on the details from the credit report. So, what’s the difference between them, and which are some of the free credit scores misleading?

The Difference in Credit Scores

According to credit.com, a FICO score is a calculation based on “predictive analytics.” This means they use information obtained in a credit report to predict the consumer’s credit worthiness. While FICO itself is not a credit reporting agency, they pull details from Transunion, Equifax, or Experian to create a score.

Vantage Score is a model that was created by the three credit reporting bureaus. Designed to offer a competitive alternative for the FICO score, the score is used to give individuals an overall picture of their credit standing. It is ideal for those with little credit history. These reports are largely advertised at free or low-cost for consumers.

While many financial institutions and websites claim to offer free credit scores, it is important for consumers to understand that not all credit scores are the same. Several companies use various formulas to arrive at a final credit score. For example, Discover’s It Card uses FICO scores for its cardholders, while Credit Karma uses Vantage Score. Additionally, the three main credit bureaus use different computations and score ranges to give to lenders and individuals. Experian scores range from 330-830, Equifax scores are from 280-850, and Transunion scores range 300-850. This information is important because if the same person requests their credit score from each bureau, it is a strong possibility they will have a different score from each one. A score discrepancy of a mere 20 point could increase interest rates or result in a denial from a lender.

Perception Versus Reality

Consumers expect their credit score to reflect the information found in their credit report. However, since many companies can use varying criteria to determine a person’s credit score, details from the credit report are not evaluated the same. It is very common for the same person to have a FICO score that is significantly higher or lower than their Vantage Score.

There are countless amounts of people signing up for free credit scores under the assumption that all credit scores are the same. For the most part, all credit scores are computed based only on what the three credit bureaus report. The information is not weighed the same, causing different credit reporting companies to arrive at different numbers. For example, some educational scores may base their score on the last six months of credit activity, while a FICO score could be based on the last 2 years or more. Both credit reporting companies used the same credit reports for their scores, but the content of the reports were weighed differently. Many consumers do not know or understand this, and never see the credit report lenders see when they are applying for loans and credit.

Are Free Credit Reports Misleading?

Some credit monitoring companies work exceptionally hard to market their financial products to consumers. Television ads and sponsored web searches are glittered with promises from these businesses. Credit Karma is an example of a financial agency promising free credit reports and scores. However, it is not clearly advertised or explicitly stated that the credit score they provide is not the same as the score lenders use. Most lenders use FICO scores to evaluate a person’s credit. Like Credit Karma, many credit reporting companies do not disclose or clearly market their scores are different from FICO scores. Each year, banks can make millions of dollars due to “add-on” services. By offering a free credit score, they could persuade people to purchase other credit monitoring products. If it is not clearly communicated that the information and credit scores are not the same criteria used by lenders, it is misleading.

Which Type of Report Is Better?

Liz Weston, a Nerdwallet personal finance columnist suggests getting a FICO score if you’re going to pay for credit score. A FICO score is the best option if you are in the market for a huge purchase, such as a car or mortgage. Home mortgage companies still rely heavily upon FICO scores.

The Vantage Score is the most common score advertised in free credit score marketing. It’s ideal if a person wants an idea of how their credit is doing. Weston also points out that the FICO score and Vantage Score are different. However, the same behaviors, such as paying bills on time, can positively impact the score.

Obtaining a free score

Credit scores are different from credit reports. Obtain your credit score free of charge once per year from each credit bureau. Typically, FICO credit scores must be purchased. There are some circumstances in which a FICO credit score must be furnished without cost to the consumer. These situations include when:

  • A person is applying for a mortgage
  • A lender uses credit scores to determine pricing of a product, loan, or service
  • An individual is denied credit based on credit

If any of these situations occur, you should make a written request to ask which credit score is used.

Making financial decisions can be challenging, especially with myriads of products promising to have the most accurate information. When obtaining free credit scores, it is important to distinguish between a FICO score and newer alternative scores. Understanding the difference between scores could impact the next financial decision you make.

Credit report with credit score

How to Get Your Free Credit Report And Credit Score

How to Get Your Free Credit Report And Credit Score

Your credit score can affect your financial life in many ways. It can change the rate you get on a mortgage, the likelihood of credit card approvals and even the application for your dream job. In addition, reviewing credit reports and credit scores may help you detect signs of identity theft on time.

People sometimes get confused and think that credit reports and credit scores are the same thing. Here is what you need to know about both of these terms:

A credit score is the numerical value calculated from information in your credit file. In other words, it is a “grade” of your creditworthiness. This score changes over time so it can accurately reflect your current financial behavior.

On the other hand, a credit report is a brief picture of your financial reliability: mainly your history of paying debts and other bills. In addition, they include information like number and types of accounts you have, collection actions outstanding debt, your accounts age, among others. It is worth noticing that your credit score is calculated from the information of your credit report.

It is useful for you to have access to both reports. Let’s start first with how to get your free credit report.

How To Obtain Your Free Credit Report

According to federal law, you have the right to ask for a free credit report every 12 months from each of the three nationwide credit report companies: Equifax, Experian and TransUnion. Following these easy steps you will get your report online very quickly:

  • Go to annualcreditreport.com.
  • On the home page, click on the red button “Request your free credit reports”
  • Complete the 3 steps highlighted in the page:
  1. Fill out the form (one for each of the 3 reports you would like to get)
  2. Pick the report you would like. Remember you can choose a report from one, two or even the three credit report companies.
  3. Request and review your reports: To do so, you will need to answer some more questions. They are supposed to be hard and you may even require your records to answer them. After getting your reports, it’s advisable to print them so you can check at them later.

If you don’t feel comfortable with the online request, there is always the old-fashioned way: just call 1-877-322-8228. You will need to provide some basic information about yourself such as your name, address, social security number, and date of birth (in order to verify your identity).

After reviewing your reports, if you see something strange and would like to dispute information, place a fraud alert or if you have a specific question, contact directly the credit agencies via online or by phone:

How To Obtain Your Free Credit Score

Before showing you the ways of obtaining your free credit score, you should remember the pre-conditions you must meet in order to have a FICO credit score (the most used credit scoring system):

  • Have at least one account opened for 6 months or longer
  • Your account has been reported to the credit bureaus within the past 6 months
  • Have no indication of being deceased on a credit report

If you have ticked all the previous “boxes” and are in compliance with all the prerequisites, you can start searching for your credit scores.

Below you can find some free and reliable sources to get your scores:

MyFico

MyFico is the consumer division of FICO, the creators of the score methodology 25 years ago. Although it does not provide your actual credit score for free (it charges $30 per month for the full service), there is a Fico Score estimator on its website. It could be useful to get an easy and quick estimation of your score. All you have to do is answer around 12 multiple choice questions related to your credit history such as:

  • How many cards do you have?
  • How long ago did you get your first loan?
  • In the last 10 years, have you ever experienced bankruptcy, tax lien, foreclosure, repossession or an account in collections?

If you are clear about your credit history, you will be able to answer all of the questions and get your estimated score in less than five minutes. Remember: this is not your actual score, but if you responded the questions accurately then it will provide a decent estimation.

Freecreditscore

As it is part of Experia and it provides both a free credit report and score from this agency only. In addition, it provides 7 days a week support and no credit card information is required. You will only need to provide your personal information. Freecreditscore is definitely an excellent choice if you only want or need the Experia information.

GofreeCredit

There is a 7-day trial option that will provide you with your TransUnion credit score for free. After that, you will be charged $20 per month. You can cancel your membership whenever in those 7 days without any charge.

Freescoreonline

Freescoreonline offers a 7-day free trial membership that gives access to the three bureaus credit scores. After that, you will be charged $40 per month. Again, you can cancel your membership whenever in those 7 days without any charge.

Ask your credit card provider

An increasing number of people are now finding FICO scores on their monthly credit card statements (around 50 million now according to the Consumer Financial Protection Bureau). The Federal government has been encouraging card issuers to offer this service, and there is a new program that allows them to make it at no cost. Most of the biggest banks (Discover, Barclays, Chase, among others) are now providing this service for free and it is expected that most of the major banks will start doing it soon.

Tips

  • There are many ways to get your free credit report and free credit score. We recommend understanding first which source is best suited for you before start requesting the actual scores.
  • Sometimes a combination of two or three websites could be the way to go.
  • It is a good practice to look both at your credit reports and scores for consistency and complete information.
  • If you choose a “free trial membership” then you may want to create a reminder to cancel it before the paid-membership period starts.
  • If you want assistance in increasing your credit score, view the best credit repair companies. It’s important to choose a reputable credit repair company.