Report highlights consumer confusion about credit scores
New consumer watchdog group says wide variety of scores breeds frustration
Confused by credit scores? The Consumer Financial Protection
Bureau feels your pain.
In a report released Tuesday, the Consumer Financial Protection Bureau (CFPB) acknowledged just how challenging
it can be for consumers to navigate the wide variety of credit scores offered
by lenders, credit bureaus and other companies. As a result, the credit scores
seen by consumers and the credit scores used by lenders are frequently very
"A consumer, unaware of the variety of credit scores
available in the marketplace, may purchase a score believing it to be his or
her 'true' (or only) credit score, when in fact, there is no such single
score," the CFPB said in its 20-page report.
The report -- mandated by the Dodd-Frank Wall Street reform law -- comes just days before the year-old agency gets its teeth as a consumer watchdog agency. As of July 21, the agency will begin to police banks, credit unions, debt collectors, payday lenders and other financial services companies. On that same day, free credit scores will begin to be provided to consumers who are denied loans or given
less-than-ideal terms. "Consumers will then begin to see and receive many
more credit scores than they had been exposed to previously," the CFPB
CFPB, meanwhile, isn't finished
looking at credit scores. The bureau will "obtain a substantial
database" of consumer reporting information in order to determine whether consumers
and creditors are actually seeing different credit scores and to what extent
consumers are being hurt -- though it remains unclear when a report would eventually be released on those findings.
Cause for confusion
Credit scores are used by lenders when deciding whether to extend credit to
potential borrowers, as well as in determining the size of credit lines and
amount of interest charged to approved loan applicants. Credit scores can also
be used when adjusting the rates and terms for existing accounts. That
combination makes credit scores important information for borrowers to know --
and makes confusion over scores a real problem.
So what accounts for the confusion? The CFPB pointed to some
The consumer may apply for a loan with a lender
that uses a different scoring model than the one purchased by the consumer.
The consumer and lender may obtain scores based
on credit report data from different credit bureaus, the companies that
maintain credit reports.
The data in the consumer's underlying credit
report may change significantly between the time when the consumer buys his or
her score and when the lender obtains the consumer's score.
Some consumers lack even a basic understanding of credit
scores. While acknowledging that there is little research into consumers'
understanding of credit scores, the CFPB report highlighted a survey
earlier this year by credit scoring company VantageScore and the advocacy group
Consumer Federation of America. According to the survey, nearly half of
respondents didn't know that a credit score is designed to predict the
likelihood of a consumer failing to repay a loan.
Consumers should not be encouraged to spend good money on a score that is of little use to them in seeing themselves as lenders see them
Even for borrowers who understand what a credit score does,
there can still be confusion that results in costly mistakes. "Some
consumers may settle for less favorable terms or may forgo applying for credit
if the scores they purchase lead them to believe they will be viewed as poor
credit risks, although the scores received by lenders would imply
otherwise," the CFPB said. "Alternatively, a consumer who incorrectly
expects to be considered a good credit risk may apply for loans for which he or
she could not qualify, leading to disappointment, wasted effort and unnecessary
inquiries on a credit report, which could depress his or her score
Credit scoring is big business
Despite that confusion, consumers are increasingly willing
to part with their cash in order to access their credit scores. According to
the CFPB report, the market for sales of credit reports and scores has grown in
recent years to more than $1 billion in revenue. Additionally, sales to
consumers make up approximately a quarter of the U.S. revenues of the credit
bureaus and their affiliates.
Consumer advocates warn that borrowers need to be careful.
"Consumers should not be encouraged to spend good money on a score that is
of little use to them in seeing themselves as lenders see them," says
Linda Sherry, director of national priorities for the nonprofit Consumer
"The CFPB study on consumer versus lender-used credit scores sheds light on the fact that it's very hard for consumers to go out and proactively buy or otherwise obtain the same credit scores that their lenders are using. However, it's very easy for consumers to buy credit scores that have little or no meaning in the real lending world," says John Ulzheimer, president of consumer education at SmartCredit.com.
Still, credit scoring is big business. Along with credit
scoring giant FICO, as well as the U.S. credit bureaus (Equifax, Experian and
TransUnion) and their affiliated credit monitoring services, credit scores are
also available from major third-party credit monitoring services:
As its next step, the CFPB plans to obtain credit reports
and scores for 200,000 consumers from each of the three major U.S. credit
bureaus. It's all part of an effort "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."
See related: New consumer watchdog opens for business amid controversy, questions, New Fed, FTC rules mean more free credit scores for consumers, Consumers lack basic credit score knowledge, survey shows
Published: July 19, 2011