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.