November 11th, 2010 10:42 EST
Hoax Alert: Beware of Your Free Credit Report
Turns out, most free credit report websites are trying to scam you out of your hard-earned money.
Sure, these websites might give you access to your free credit report, but they will also try to sell you your credit score. But the credit score they provide is total junk.
Beware of Your Free Credit Report
The system is admittedly a little confusing. I`ll start with the basics.
You might be surprised to learn that you have more than one credit score. Your credit score will change based on who is pulling the score and the formula the credit-reporting bureaus is using to report the score. If a lender pulls your score, the credit-reporting bureaus will almost always use something called the FICO formula. If you, the consumer, pull your own score, the credit-reporting bureaus will almost always use something called a Consumer formula.
There are three major credit-report bureaus: Equifax, TransUnion, and Experian. These bureaus are responsible for collecting your credit information and then reporting your score. They know that different people are interested in different factors. A bank considering your credit card application is interested in different factors than an employer considering your job application. So they use different formulae, each of which produces different scores.
The trouble is that no one--no lender, no credit card company, no employer, and no landlord--will ever use your Consumer score. And this is the score you will get if you buy your credit score from most free credit report websites.
For instance, take a look at AnnualCreditReport.com, the website created in response to FACTA, a federal consumer-advocacy law intended to help consumers access their credit information. While downloading your free annual credit report, you will be offered your Equifax credit score for $7.95. Check out the fine print:
"The Equifax Risk Score [a Consumer score] and the credit file on which it was based may be different than the credit file and credit scoring model that may be used by lenders."
The truth is that the score a lender uses will be different. I have been in the mortgage industry for 14 years, and I have never once used an Equifax Risk Score. When writing my book about how to build credit, 7 Steps to a 720 Credit Score, I studied tens of thousands of credit reports and credit scores used by my loan office. All of them--a full 100 percent--were based on the FICO formula, and not one of them used a Consumer formula such as the Equifax Risk Score.
This bears repeating: 100 percent of the tens of thousands of credit reports and credit scores that my loan office used to determine creditworthiness were based on the FICO formula.
So just how different are the credit scores sold on free credit report websites?
I tested this with my own credit file by pulling my FICO score and my Consumer score on the same day. My FICO score was a whopping 237 points lower than my Consumer score.
Then I asked my friends, Jos and Michael, to let me run an experiment on their credit scores. Again, the Consumer score was artificially high. Michael`s FICO score--the score a lender would consider--was 79 points lower than his Consumer score, and Jos`s FICO score was 54 points lower than her Consumer score.
In all three circumstances, the Consumer score was higher.
This provides would-be-borrowers with an artificial sense of security. Prospective homeowners do a little research, realize that lenders provide the best interest rates to people with FICO scores of at least 720, then they buy their credit scores from a free credit report website.
They don`t realize that the credit score they are buying is not a FICO score. And when their Consumer credit score comes in at 745 or 815, they think they are out of the woods. Instead of taking the steps necessary to build their credit scores, they sit back and relax.
But when it comes time to buy a house, their loan applications are either denied due to low credit, or they end up paying more interest than they expected. In Jos and Michael`s case, the difference in interest on a $300,000, 30-year, fixed-rate home loan would have been about $12,000.
And this is a problem for everyone, not just prospective homeowners. What about the folks who carry credit cards and finance their cars? These people buy their Consumer scores, and then wonder why they are not qualifying for better interest rates. My credit score is high, they think. I guess these are the best available interest rates.
Little do they know that they should take a few simple steps to build their real credit score--their FICO score.
So what should you do about the free credit report scam? Get an accurate representation of your credit score directly from FICO, where you can always get your TransUnion and Equifax credit scores. Downloading your free credit report from some other site is not necessarily a bad idea, but never buy a credit score from anyplace other than FICO.
Philip Tirone is a mortgage broker and the author of 7 Steps to a 720 Credit Score. Download his free consumer-advocacy ebook, What Your Banks Won`t Tell You About Credit: 35 Important Facts They Hope You Never Find Out, to help people avoid scams like the free credit report offer.