CFPB finds differences in credit scores

The credit score you purchase from a credit reporting agency may be very different from the score your lender sees.

The credit score you purchase from a credit reporting agency may be very different from the score your lender sees. Lender’s scoring models place nearly one in five consumers in different credit categories, according to a new report by the Consumer Financial Protection Bureau. This means consumers can’t exclusively rely on the credit score they purchase from credit agencies to be an accurate indicator of the interest rate on the loan they will receive.

The study found the majority of consumers received credit scores that were similar across the different scoring models. The scoring models placed consumers in the same credit-quality category 73 percent to 80 percent of the time. However, scoring models placed consumers in a different category 19 percent to 24 percent of the time. This can mean a higher interest rate if the lender’s scoring model places you in a lower credit category. This can also impact your job search or application for an apartment because some employers, landlords, and even insurance agencies now use credit scores in their screening process.

“This study highlights the complexities consumers face in the credit scoring market,” Richard Cordray, the CFPB director said in a statement. “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.”

Lenders use credit scores to predict how the applicant will handle credit and repay the loan. The higher the credit score, the lower the perceived risk. For consumers, applying for any type of loan usually starts with buying a credit score to see how the lender will judge you and to make an educated guess about the rate and terms you might receive. The credit score the lender and applicant use should be similar, or at least in the same category, so both parties can make a good decision.

There are three major credit reporting agencies — Experian, TransUnion, and Equifax — but there are many credit scores. The FICO score is the most widely used and the VantageScore is a joint venture of Equifax, TransUnion, and Experian.

Differences in credit scores, even small variations, can lead consumers to make bad decisions about loans, such as applying for credit lines you may not qualify for, or avoiding credit altogether because you underestimated the judgment of the lender. The consumer may also assume lenders with higher rates are the only option available and pay higher costs for the loan.

Beginning Sept. 30, the CFPB will monitor more than 30 of the country’s biggest credit bureaus and investigate whether they are following the law. The federal government has never had widespread access to information about the credit reporting industry. But the CFPB will also have oversight over specialty credit reporting companies, including those that focus on payday loans, resellers of credit reports, and companies that analyze credit report information. The CFPB will monitor accuracy of the information and the processes that govern error resolution.

Fredrikson & Byron Law