The myth of the 'true' credit score

The score a lender reviews is not the same as the score you've purchased from a credit-reporting agency.

By MSN Money Partner Aug 17, 2011 5:56PM

This post by The Dough Roller comes from partner site U.S. News & World Report.


Personal-finance experts extol the benefits of periodically reviewing your credit reports and scores. In fact, credit reports are so important that federal law requires the three major credit-reporting agencies to make credit reports available for free (seeAnnualCreditReport.comfor more details).


While federal law generally does not require credit-reporting agencies to give consumers their credit scores, there are many ways to get your score -- some free and some not. 


Consumers can purchase their credit scores in several ways. They can get access to their credit score from one of the three major credit-reporting agencies when they get their credit reports. Consumers can also get their credit scores when they purchase credit monitoring or identity theft protection services. But here's the problem: The credit score consumers receive is not the same credit score lenders receive when evaluating an application for credit. Post continues after video.

The Dodd-Frank Wall Street Reform and Consumer Protection Act addressed this discrepancy. The law requires the newly formed Consumer Financial Protection Bureau to "conduct a study on the nature, range, and size of variations between the credit scores sold to creditors and those sold to consumers by consumer reporting agencies that compile and maintain files on consumers on a nationwide basis … and whether such variations disadvantage consumers."


Last month, the CFPB released its first report on the differences between credit scores sold to creditors and scores sold to consumers. And the conclusion was eye-opening: "When a consumer purchases a score from a (credit-reporting agency), it is likely that the credit score that the consumer receives will not be the same score as that purchased and used by a lender to whom the consumer applies for a loan."


There are several potential reasons why scores may vary:

  • Educational scores. The scores consumers purchase are often what the CFPB calls "educational scores." While these scores may provide consumers with some indication of how potential lenders will view their creditworthiness, educational scores vary from the industry standard FICO scores.
  • Industry scores. Even if a consumer purchases his or her FICO credit score, it may vary from industry-specific FICO scores. Not all FICO scores are the same, and certain industries (e.g., auto and home loans) use variations of the FICO scoring formula designed specifically for those industries.
  • Custom scores. As if educational and industry scores were not confusing enough, some of the larger industries use custom formulas specific to their business. These scores typically start with a FICO score, and then make adjustments to the score based on a proprietary scoring formula known only to that company.
  • Credit-reporting agency variations. The three major credit-reporting agencies generally have different information on file for each individual in their databases. As a result, even if the same scoring formula were applied to the data on file, the credit-reporting agencies would typically generate different credit scores based on the information they have on file. As a result, a consumer-purchased credit score would likely vary from what a lender sees if the scores are generated by different credit-reporting agencies.

Just how big is the difference in scores? It's a question the CFPB is looking into. In conjunction with the credit-reporting agencies, the CFPB is conducting a study to determine the scope of the variances between credit scores provided to consumers and those provided to lenders.


To undertake this study, each of the three national credit-reporting agencies will provide data on 200,000 consumers to the CFPB. The data will not include any information that could identify the consumer files selected for the study. According to the CFPB report, the "purpose of the data analysis will be to determine with greater precision and understanding the nature, range, and size of variations between the credit scores most frequently sold to creditors and those most frequently sold to consumers."


For now, however, consumers will have to accept that there is no "true" credit score. In fact, given educational scores, industry scores, custom scores, and variances in credit history among the three national credit-reporting agencies, most consumers likely have many credit scores. And while educational scores can provide insight into the creditworthiness of a consumer, it's best to take the score with a healthy grain of salt.


More on U.S. News & World Report and MSN Money:


Aug 17, 2011 7:10PM

Ah...the ever mystical credit score...the score that is used inappropriately for so many things.  Employment...Insurance...etc.  What a joke.


All a cred$hit score is good for is a report on how you manage your personal finances...I hate the fact that they use it for job worthiness...a credit score has nothing to do with that.  criminal convictions for fraud, theft and embezzelment are better indicators. 


Similarly, a driving record or claims history is best suited for setting individual insurance rates.


It would be nice if our elected representatives would recognize that and protect our interests instead of the bank's...

Aug 17, 2011 8:35PM
just one more way to stomp on real american working families
Aug 18, 2011 10:16AM

My credit is not bad, just don't have much of it....the credit reporting company "advice" to increase my score was to get a mortgage, how can you get one.... if you can't increase your the score they use to determine worthiness.... without a mortgage ?  Seems like a huge game played by those that want to control the flow of credit and least they should agree to play by the same rules.

Aug 18, 2011 2:03PM
In 1980 I received a car loan from my bank.  Kathy took the time to know ME.  She saw how much money I made and what my bills were and based on THOSE FACTS ALONE, I got the car loan.  Credit scores didn't exist then.  Back then it was worth it to have a personal relationship with your banker.  Today, forget it!  You're just a number.  Credit scores are the biggest scam ever run on us.  What in the hell does a credit score have to do with how much I pay for car insurance?  Getting a job?  This is just a very clever manipulation by the banks for them to charge us higher interest rates and so forth.  Personally, if someone doesn't want to do business with me because of that stupid 3 digit number, fine.  Believe me, there is ALWAYS someone willing to take my money.  And you can never go wrong just using cash.  By the way, my credit score is about 700.
Aug 18, 2011 9:06AM
You can get a free credit score at Credit Karma. 
Aug 18, 2011 6:33PM
I could care less about credit!!Me and my wife don't use it and don't need it.We have a debit card from wal-mart that our checks get direct deposited on and we use the card to pay for everything.It has never kept us from buying a house a car..etc.They can take their credit scores and shove it where the sun don't shine.This country is a huge ponzi scheme and the music is about to stop.God we need a revolution..RON PAUL 2012!!!
Aug 18, 2011 6:25PM

Don't ja jus luv it!!


Two or three sets (or more) of books on the same account....only in the credit (banking) business!

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