What Your Credit Score Doesn't Tell You

"A little knowledge is a dangerous thing." We're not sure what Einstein was talking about when he said that, but he could easily have been talking about your credit score. Because, as outlined in a recent report to Congress by the Consumer Financial Protection Bureau, "The Impact of Differences Between Consumer- and Creditor-Purchased Credit Scores," the document you see when you buy your credit score contains very little knowledge compared to the score a lender sees when deciding whether to grant you credit.

"It is important to note that many of the credit scores sold to lenders are not offered for sale to consumers," reads the CFPB report.

The two scores may differ in any number of ways because there are so many different scoring models in use these days. The scores used most often by lenders are FICO scores, which are compiled by Fair Isaac Corp. But Fair Isaac alone makes scores using a variety of models -- and there are many other scoring companies and models in addition to Fair Isaac.

Suffice it to say, as CFPB does, that the scores sold to consumers by the top three credit agencies -- Equifax, TransUnion, and Experian -- are "'educational scores' either not used by lenders at all or used only infrequently."

Aside from being annoying, this discrepancy could be costly if you're seeking credit.

First, if the score you purchase makes you think your credit is better than it actually is, you're likely to waste your time and money applying for loans you don't have a hope of getting. And this, in turn, could damage your credit score further, because credit-rating agencies assume that a large number of loan applications on your part indicates that you're not financially sound.

Second, if the score you buy leads you to believe your credit is worse than it actually is, you may give up on applying for credit altogether. Or you might accept less money and worse terms than you're eligible for. (In this scenario, the CFPB dryly notes, "a lender may not have an incentive to clear up the consumer's confusion.")

Luckily, the financial-reform law that took effect in July requires lenders to pull back the curtain at least a little bit. The law says lenders must supply you with a free copy of your credit score if they deny your loan application, or if they approve your loan at a higher rate than the rate they give their top customers.

The score a lender provides you must be the same score it used in making its decision, not an "educational" version. The lender must also outline the factors that impact your score and tell you where your score ranks overall.

Of course, that information is just a snapshot in time. If you apply for a loan a year later, your credit score could be quite different. For a picture of your credit score before you apply for a loan, order your credit reports from each of the three major credit bureaus. You can do that at AnnualCreditReport.com. These reports won't tell you what your score is exactly, but they will give you a good idea, because they're what the various credit-scoring companies use to compile their scores.

The most informative credit score is your FICO score. It's used by 90 percent of banks when making lending decisions. You can get a free copy at myFICO if you sign up for a trial membership. The trial is 10 days, and there's no charge if you cancel within that period. After that it's $14.95 a month.

Confused about how your credit score is calculated? You're not alone. Be sure to read 5 Common Myths About Credit Scores.


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