The Myth of a “True” Credit Score

The fact that consumers have more than one score often leads to confusion.

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Personal finance experts extol the benefits of periodically reviewing your credit report and score. In fact, credit reports are so important that federal law requires the three major credit reporting agencies to make credit reports available for free (see annualcreditreport.com for 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 for free. And it’s consumers’ access to their credit score that has created a problem.

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Consumers can purchase their credit score 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 as part of purchasing either credit monitoring or identity theft protection services. And here’s the problem—the credit score consumers receive is not the same credit score lenders receive when evaluating an application for credit.

The Dodd-Frank Wall Street Reform and Consumer Protection Act addressed this discrepancy. The Act 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 CPFB 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.”

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There are several potential reasons why scores may vary:

1. 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 credit worthiness, educational scores vary from the industry standard FICO score.

2. 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.

3. 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.

4. 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 from different credit reporting agencies.

So just how big is the difference in scores? It’s that questions that the CFPB is studying. 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.

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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 credit worthiness of a consumer, it’s best to take the score with a healthy grain of salt.

DR is the founder of the popular personal finance blog, the Dough Roller, and author of 99 Painless Ways to Save Money.

Corrected on 8/22/11: A previous version of this story misidentified the Consumer Financial Protection Bureau.