Your Credit Score: Secret, Especially From You

Do you think you know your credit score?

Credit scores – the numeric measure that shows lenders whether a person is likely to repay a loan – are a must-have accessory for anyone seeking a mortgage, automobile loan, credit card or even just to rent an apartment.

The person or company lending you money for a home, car or credit card splurge, knows your score and uses it to justify the interest rate you are charged for that loan.

Knowing your score helps you guess at how they arrived at that interest rate.

Guess? Yes, guess.

When consumers purchase a credit score — credit reports are free, scores cost money –  they believe they are looking at the same information a lender uses to judge their creditworthiness. In most cases, they are not.

The Consumer Data Industry Association (CDIA) estimates about 3 billion credit reports are issued every year. The reporting agencies collect information from a variety of sources ranging from lending institutions to debt collectors to public records to the landlord you didn’t like four years ago.

The reporting agencies use that information to arrive at a credit score. The CDIA estimates that 36 billion updates are made to consumer files or about 10 changes every second and that is only one of the ways your score could be different from the score the lender is using.

Is The Score FICO Or “FAKO”

Fair Isaac Corporation, better known as FICO, came up with the algorithm for determining a credit score in 1958. Since then, they have come up with many new algorithms that target specific industries or specific segments of industries. FICO sells 49 different scores to lenders.

By contrast, myFICO.com, which offers scores to consumers, sells only two versions. In fact the score consumers purchase is called an “educational score,” which is a polite way of saying “close enough.”

The “educational score” almost always differs, sometimes dramatically, from the scores sent to car dealers, furniture stores, mortgage lenders, landlords, insurance agents or the thousands of other businesses that use it as part of their decision-making process.

A consulting firm hired by the Consumer Financial Protection Bureau (CFPB) said that 90 percent of lenders use the FICO score in making decisions.

The CFPB compared the scores sent to lenders with those sent to 200,000 consumers and concluded that 20 percent of the people that purchase a credit score receive one that is meaningfully different than the lender receives.

The difference could be dramatic enough to cause much higher interest rates and, depending on the length of the loan, increase the cost by hundreds or even thousands of dollars.

Even more disconcerting is the fact that businesses don’t always update when FICO revises its credit scoring model. In other words, a lender may be using the 2001 version of the FICO scoring model when it asks for your 2014 credit score.

Legislation For Credit Score Transparency

Rep. Steve Cohen (D-Tenn.) and Sen. Bernie Sanders (I-VT) introduced a bill in March of 2013 to require credit reporting agencies to give consumers a reliable score, one that is actually used by lenders.

The bill was an amendment to the Fair Credit Reporting Act and would have given consumers access to all scores generated in the previous year, not just the ones that resulted in being rejected for credit.

And, the credit score was supposed to be free. In fact, the legislation asked that it be included with the free credit report that consumers can order under the provisions of the Fair Credit Reporting Act.

It was referred to House Committee on Banking, Housing and Urban Affairs where it died a very quiet death.

FICO Scores Could Go Up Soon

In August, FICO did announce that it was rolling out another new model and that medical debts, which account for about half the unpaid collections on credit reports, would not carry as much negative impact as they previously did.

Consumers with some unpaid medical debts, but an otherwise clean slate, could see their scores go up anywhere from 25 to 50 points, but there is a catch here: It only happens if the business seeking your credit score has updated its software to accept the new FICO model.

When FICO comes out with a new algorithm to update changes in economic conditions, businesses don’t have to update with them. In fact, when FICO rolled out a new model in 2008, it admitted that only about 50 percent of businesses were using it five years later.

So, back to square one in trying to determine if you know you’re credit score.

The best news for consumers might be to understand that credit scores are just one piece of information lenders use in determining your credit worthiness. Income, length of time at your current job and the type of credit you’re seeking, also are factors.

But it would be nice to have a reliable credit score with you at the negotiating table.