Wednesday, November 12, 2014

Want To Know Your Credit Score? Good Luck.

Several years ago, the passage of the Fair And Accurate Credit Transaction Act required credit bureaus to provide consumers with a free copy of their credit report once a year. This was a great boon to consumers. We no longer were kept in the dark about our credit history and the information credit agencies had in our file. The law also spelled out a clear process for consumers to dispute inaccurate information and set up rules on how and when the credit agencies have to respond to such correction requests.

However, in addition to a credit report, most credit bureaus also produce a credit score. This score is generated by taking all the information found in our credit report and running it through some proprietary algorithms, which reduce it to a single number. This number is NOT required by law to be disclosed to consumers and, in fact, many of the credit bureaus will charge you to find out this information. If you are in the market for a new loan, you may be tempted to purchase this information. You may also be hit up to purchase this information when you request your annual free credit report. Don't bother.

First of all, many companies are now providing this information for free. For example, about a year ago, Discover credit card starting providing their card holders with this information with their monthly statement. I've noticed other credit card companies, banks, and some brokerage firms have started doing the same. ( will also give you your credit score for free.) You may also get your score when a lender pulls your credit report during the loan approval process. Granted, if you want to find out your score before applying for a loan, this is a bit too late, but if you are just curious, there is no need to pay for this information.

The biggest argument against paying to get your credit score is this: you have no idea which credit score your lender is going to use. That's right - there is more than one credit score out there. Just as there is more than one credit bureau that has a credit file on you, you also have more than one credit score. Each credit bureau has their own score and some have more than one.

Here's a real world example: On a recent Discover card statement, my credit score was reported to be 847 out of a maximum of 850.

About one month later, as part of a refinance, I was given a copy of the credit report and credit score my credit union obtained during the loan approval process. Guess what? It was different than what my Discover card reported.

In general, when you hear someone talking about a "credit score," they are referring to the FICO credit score - by far, the most widely used credit score. It was developed by a company called Fair, Isaac, and Company (hence "FICO") in the late 1980s and the number was based on the information contained in your credit reports from the three major credit bureaus - Equifax, TransUnion, and Experion.

The exact formula for coming up with your score is not public information, but it's roughly calculated as follows:
  • 35% is based on your credit payment history, i.e. do you pay late or on time.
  • 30% is based on how much debt you have, i.e. how many accounts you have open, your debt to available credit ratio, remaining balance on installment loans, etc.
  • 15% is based on your length of credit history, i.e. how long have you had your credit cards.
  • 10% is based on the types of credit you use, i.e. credit cards, mortgages, etc.
  • 10% is based on recent credit inquires, i.e. how many times has your credit report been pulled recently.
As you can imagine, these factors change monthly, so your credit score will change monthly as well. That right there is your first clue that you will never be able to definitively say "My credit score is X."

But it gets more complicated. As I mentioned earlier, the FICO credit score isn't the only score out there. Each credit bureau has their own score they generate. And even if FICO was the only company creating a credit score, you STILL wouldn't be able to tell what score might be reported to a lender because FICO itself offers FIVE different versions of their score, each one calculated a bit differently.

You might have heard credit scores range from 300 to 850 points. That's for the first model FICO came up with. Some of their other models have ranges from 250 to 900 or 150 to 950. And that's just at FICO. The other credit bureaus' credit score have different ranges. Some go from 1 to 999, others from 250 to 850.

To make matters worse, some of these scores are not available to consumers at all, for any price. They are only provided to other financial institutions.

Let's go back to the scores I received with my refi. Here's what I got:

Notice the type field for all scores is "FICO". The Brand identifies which of the various FICO scoring methods was used to calculate the score. And also note the possible ranges for the scores vary (and none match the score or range reported to me by Discover card on my statement). Furthermore, realize that each credit agency may not have the exact same information in your credit report as other the other agencies do, so even if two companies use the same type and brand, they may still arrive at a different score.

The bottom line is this:

Don't bother paying to get your credit score.

Odds are high that whichever one you buy will not be the one used by your lender. If you must have a number to fixate on, look for a credit card or brokerage firm that provides this information for free. Then, realize your credit score is not a hard and fast number. It will vary, depending on who calculates the number and from month to month. But in general and across all credit score models, the higher the number, the better. And the more positive information your credit report contains, the higher your credit score will be, no matter which calculation method is used. Just keep your financial life in order and your score will rise to the upper limits of all of the various formulas.

(The day after I wrote this post, Two Cents, Lifehacker's personal finance blog, posted a story about this topic with lots of ways to get your credit score for free. Check it out here.)


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