Have you ever been told by a loan officer that your credit score doesn’t qualify for their advertised low interest rate? You wonder, “How can this be? I just checked online and my credit score was 740, which is considered excellent!”
We’ve all seen the TV commercials exhorting us to take charge of our credit and finances by knowing what’s in our credit report. That is good advice since incorrect information, or bogus accounts due to identity theft, could potentially wreck your credit. The commercials also stress the importance of knowing your credit score, that mysterious number that tells creditors whether or not you are credit worthy.
These commercials are usually selling is an online service sponsored by one of the three major credit bureaus; Equifax, Experian, and TransUnion. For a monthly subscription fee, they provide access to your credit scores and history. What they don’t tell you is this – the credit score you receive from these websites is probably not the same credit score that lenders obtain when qualifying you for a loan.
For the most part these “credit scores” are estimates of your credit score, not the actual FICO scores (Fair Isaac Corporation, a California-based company that developed the first credit scoring system) used by lenders. The FICO scores supplied to lenders by credit bureaus could be considerably lower, as much as 20, 30, 40 points or more. This can mean the difference between being approved, not being approved, or being approved but at a much higher interest rate than advertised.
If you search around credit score websites long enough, you will find the disclosure explaining this discrepancy. For example, the website for Equifax states the following: “The Equifax Credit Score™ is a proprietary credit model developed by Equifax. It may be calculated using the information in your Equifax, Experian and TransUnion credit files. This score is intended for your own educational use. There are numerous credit scores and models available in the marketplace and lenders may use a different score when evaluating your creditworthiness.”
The credit “scores” from most online companies are useful only to the extent that they can alert you in the case of a sudden decrease in your overall score. They could also indicate potential identity theft by reporting new, unauthorized, credit accounts.
When purchasing a online credit score, remember the phrase, “caveat emptor” or “let the buyer beware.” There are only a few websites that provide an actual FICO score. You should look for the “Official Certified FICO Score” seal on a website to ensure that you are getting an actual FICO score.
If you don’t want to pay for your credit report (remember this is your history, not your score) you can get that for free. By law everyone is entitled to an annual free credit report from all three credit bureaus. To obtain your free report, go to www.AnnualCreditReport.com.
You are also entitled to a free credit report anytime you are denied credit based on information in a credit report. Also, if you are denied credit or the best terms based on a credit score, you are entitled to a free copy of your credit score from the company that was used.
Although FICO is still considered the gold standard by most lenders, the three major credit bureaus have been developing an alternative to FICO. The new VangardScore is a direct challenge to FICO, and may eventually replace it.
According to Jack E. Karns, professor of business law in the College of Business at East Carolina University, VangardScore was developed ” because of the differences between the three scores offered by each of the companies. By merging, they hope to dominate the credit score market, thereby striking what could be a fatal blow to the Fair Isaac Corporation.”
“With so much potential confusion, Congress passed legislation in July 2010 that applies to situations where a consumer does not receive the best terms on a loan, an insurance policy application, a credit card or a utility.” said Jack Karns. ” In these cases the consumer must be shown the credit score and company that were used, and this must be done at no cost to the consumer.”
Unfortunately, the legislation does nothing to address the confusion of consumers in advance of a credit application as to what is a good score, or which credit scoring system individual lenders use when deciding your loan. The best advice is guarantee a good credit score is: make your credit payments on time, keep your balances low, and check your credit history regularly for signs of identity theft.