What does the consumer credit score you just purchased from Equifax have in common with a free-throw shot by Shaquille O’Neil?
They’re both wildly inaccurate.
In a shocking new report, the Consumer Financial Protection Bureau announced this week that it has found some serious discrepancies between the scores credit monitoring agencies sell to consumers and the scores that lenders use to check creditworthiness. Or, to put that in layman’s terms, they found that the credit scores we’ve been buying all these years are essentially worthless. Here’s why.
Consumer advocates have been complaining for years that the credit scores available to consumers appear to be different than the ones available to lenders. As part of the Dodd-Frank Act of 2010, the CFPB was tasked with investigating these claims. The agency checked 200,000 different credit reports from each of the three major monitoring bureaus – TransUnion, Experian and Equifax – and analyzed them for discrepancies.
What they found was a system in chaos. According to the official CFPB Executive Summary, the different scoring models that the credit reporting bureaus use to generate scores for consumers and lenders will place consumers in two different credit-quality categories 20-27% of the time. This renders the “educational” scores purchased by consumers essentially useless.
“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,” says the CFPB. “As such, consumers cannot exclusively rely on the credit score they receive to understand how lenders will view their creditworthiness.”
What this means is simple: at best, consumer-quality credit reports are a waste of time, and at worst they’re a despicable rip-off. What if you were to use one of these inaccurate reports to apply for a mortgage? If you apply for a loan you mistakenly believe you qualify for, your pockets will be just as empty as before. But when you apply for a certain loan because you believe that your credit rating is lower than it actually is, you may accept terms that are less than favorable. You’re simply not aware that you could have done better, and the higher interest could end up costing you tens of thousands of dollars more. We’re no lawyers, but that sounds like fraud.
Unfortunately, there’s very little we as consumers can do about this right now. The reports will remain untrustworthy for at least a few more months while the CFPB works out a plan of action. In the meantime, the agency suggests that credit seekers take two specific steps to avoid misinterpreting their creditworthiness.
First, the CFPB recommends that you shop around before accepting any loan. Since different lenders use different risk-assessment models, you’ll have better luck securing a lower interest rate by taking your business to different institutions. Second, the CFPB strongly advises that you use your right to a free credit report to review your file for inaccuracies before you apply for a loan. One mistake could cost you several points of interest, so make sure that everything is accurate before you allow lenders to run an inquiry.
Don’t let an inaccurate credit score ruin your chance at getting a good loan. Check your free report often, and shop around with different lenders before you sign for any sort of financing. That way, you’ll always know exactly where you stand credit-wise – which apparently is a lot more than can be said for TransUnion, Experian or Equifax.