There are many versions of credit scores available to consumers, and consumers shouldn’t rely on educational scores to gauge their creditworthiness to a lender.
Do you know the difference between a FICO score and an “educational” credit score?
Considering the multitude of credit scores available to consumers, those looking for a loan should be sure they are gauging their creditworthiness by the right yardstick. You may well be looking at what is called an “educational credit score,” rather than the FICO credit score many lenders use to gauge your loan repayment prospects.
Making sure you are looking at the right credit score will help you ensure that you are on the same page as the lender who is assessing you for a loan.
FICO score versus educational score
Going by a directive of the Dodd-Frank Act, the CFPB in 2012 conducted a study to look into the differences between the credit scores the credit bureaus sell consumers, typically an “educational” score, and the scores they provide to lenders, which are typically FICO scores. The study also included VantageScores, which some lenders use.
The goal was to see if any differences that surfaced put consumers at a disadvantage. The study found that in the case of a “substantial minority” of consumers, different scores produced significantly different results about their creditworthiness.For instance, as much as 24 percent of the time there was a difference of one credit category for consumers in the results the different scoring models provided. And they were off by at least two credit categories in the case of up to 3 percent of the consumers.
Moreover, the study found that only 42 percent of the time were the educational scores and the FICO scores in the same comparative range. Similarly, the educational scores and VantageScores were in the same range 42 percent of the time.
Ethan Dornhelm, vice president of scores and predictive analytics at FICO, noted in emailed comments, “It’s important for consumers to be aware that educational scores are developed with separate models and not the same model as FICO scores, which are used in 90 percent of lender decisions.”
“This can cause confusion among consumers who aren’t aware that the score they received via other sites may not be the same as the score their lender is checking,” Dornhelm added, “which can give consumers an inaccurate impression of how lenders view their credit standing.”
The differences between scoring models were more pronounced in the case of older people, and those that lived in wealthier ZIP codes, or ZIP codes with a lower presence of minorities.
The CFPB stated, “Consumers cannot know ahead of time whether the scores they purchase will closely track or vary moderately or significantly from a score sold to creditors. Thus, consumers should not rely on credit scores they purchase exclusively as a guide to how creditors will view their credit quality.”
The consumer protection agency also noted that the bureaus that sell credit scores to consumers should make them aware that the scores they provide them could sometimes vary substantially from the scores that lenders use.
CFPB crackdown on credit bureaus
In 2017, the Consumer Financial Protection Bureau cracked down on the three credit reporting bureaus for falsely marketing credit scores to consumers. It seems the scores they provided consumers were not the same ones that lenders used to approve consumers for loans. The credit bureaus paid millions of dollars in fines and consumer refunds to clear those charges.
A TransUnion representative noted in emailed comments, “We worked cooperatively with the CFPB in 2017 to adjust our consumer products to state more prominently that the score we provide is a VantageScore. More generally, we work to increase public awareness around the products we offer through blog posts and other communications.”
And an Experian spokesperson noted, in emailed comments, “Since December 2014 Experian has provided consumers the ability to obtain FICO credit scores (long before the CFPB consent order). We currently offer a FICO score at no cost as part of our ‘CreditWorks Basic’ product.”
Equifax did not respond to an email inquiry seeking comment on this matter.
See related: My credit score is 776 – and 815 – and 828?!
Multitude of scores
Further adding to the consumer confusion, there are umpteen other types of credit scores that lenders use other than a basic FICO score, the scoring model which has changed over the years to produce many updates.
For instance, FICO 9 was released in 2014, but many lenders still use FICO 8. There are also different FICO scoring versions suitable for different industries, such as a FICO auto score that lenders providing car financing use, and a FICO bank card score that aids credit card lenders. This means someone looking for a car loan would be best served by asking for their FICO auto score.
In addition, there is also VantageScore, a credit score the three major credit bureaus have developed. A lot of lenders also use this score, VantageScore Solutions reports, although mortgage lenders have been slow to adopt it.
A number of card issuers offer their customers free credit scores, which could be FICO scores. And credit bureaus too offer credit scores with their consumer protection services, with Experian offering a FICO 8 score, and TransUnion a VantageScore.
Jeff Richardson, vice president of marketing and communications at VantageScore, advises, “Consumers should check their credit scores, either FICO or VantageScore, for a directional understanding of their creditworthiness. They should pay more attention to their credit reports, which all these scoring models are based upon, and understand which behaviors are causing their scores to be low or that could improve their scores.”
How to obtain the right credit score
Considering there is no legal requirement as to which kind of score you would get when a credit bureau or card issuer offers a free credit score, it’s best to be aware of the difference between these different credit scores and look for the score that would best match your needs before you start your search for credit.
You could also buy the sort of score you want directly from FICO.
As the National Consumer Law Center’s “fair credit reporting manual” points out, “In particular, the CFPB noted that a consumer who purchases a score that is different from one used by a lender might end up with a mistaken impression of their creditworthiness, resulting in potential frustration or applying for the wrong type of loans.”