Ed's Blog

Just one day after its enforcement action against Discover Card for deceptive marketing of overpriced, junky credit card add-ons, including a credit score tracking product, the CFPB has confirmed what consumer advocates have been saying all along. Credit scores heavily marketed to consumers aren't the same as those used by lenders; CFPB found that at least 1 in 5 consumer scores have "meaningful" differences and that "score discrepancies may generate consumer harm." The CFPB went on to say:

Consumers unlikely to know about score discrepancies: There is no way for consumers to know how the score they receive will compare to the score a creditor uses in making a lending decision. As such, consumers cannot exclusively rely on the credit score they receive to understand how lenders will view their creditworthiness.

The CFPB also provided recommendations to consumers, including "shop around for credit" and "Check your credit report for accuracy and dispute errors."

More from the CFPB: “This study highlights the complexities consumers face in the credit scoring market,” said CFPB Director Richard Cordray. “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.” The complete Analysis of Differences between Consumer and Creditor-Purchased Credit Scores is available at: http://files.consumerfinance.gov/f/201209_Analysis_Differences_Consumer_Credit.pdf

Current law provides that you get a real score from lenders when you apply for a mortgage or certain credit applications (since 2004) and after you are denied credit or charged more for credit (only since 2011). This Federal Reserve factsheet explains these circumstances with as little technical language as possible.

For years, however, the credit bureaus and others have developed an extremely profitable direct-to-consumer marketing channel selling what they, when pressed, call "educational scores," but which most mortgage brokers and consumer advocates prefer to call "FAKO" scores because the leading lender-used score is from a company called Fair Isaac and Company and is called the FICO score.

It is most important that consumers do three things before applying for credit.

  • First, check your credit reports for errors and fix the errors. Don't pay for either your reports or FAKO scores or credit score monitoring subscription products. Take advantage of free credit report rights described here at the FTC. A  consumer can create her own free credit monitoring service by staggering the requests for each of the three reports (one from each major bureau,Experian, Equifax and Trans Union) across the year.  (Additional free reports are available after credit denial (from the bureau(s) used by the lender to take an adverse action) and also annually under state law (from each of those Big Three) - usually by phone -- in 7 states (CA, CO, GA, MA, MD, NJ, VT) and Puerto Rico.) 
  • Second, pay down credit card balances so your "credit utilization" is less than 33% of your available credit.
  • Finally, of course, a recent record of on-time payments on all loans will help offset any previous record of delinquencies. Past late payments decline significantly in impact as they recede into the past and are replaced by newer, on-time payments. 

On the other hand, past public record defaults (bankruptcies, accounts sent to collection for non-payment) have a worse impact than previous late payments on loans; that is why it is critical that false negative public record data be eliminated from your report. Don't believe claims of fast-talking credit repair doctors that they can eliminate truthful negative information. They cannot.

This is an important new CFPB report.

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