A recent advertising surge suggests that no-cost, personal FICO scores may be open to individuals for the first time. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law as a reaction to irregularities leading to the “Great Recession” beginning in November 2008. Part of the Dodd-Frank Act was free, annual availability of individual credit reports. Credit reports were free, but not the credit scores calculated from them. A number of independent credit monitoring services have popped up. They promise to share your score with you and to alert you if negative information has found its way into your file. Many of these services require you to buy a subscription to their service. The services charge between $10 and $30 each month to your credit card. Sometimes these credit services offer a free trial period free, but make it very difficult for subscribers to cancel services going forward. Sometimes the offer to sell is presented in a sneaky way. In any event, several monitoring companies have made filings in bankruptcy court for Chapter 11 reorganization. Chapter 11 means that the company can’t pay its bills and has applied to the court for a certain kind of bankruptcy relief. Sooo… the company, who you pay to monitor your credit standing, can’t pay its own bills. If this sounds rather like hiring the fox to guard your financial hen house, you are not alone. The other vital piece of information that you need to know is that between the three major Credit Reporting Agencies (CRAs) (TransUnion, Equifax, and Experian) sell somewhere around 1200 versions of your credit score to you and to your possible lenders. And according to TransUnion Chief Operating Officer David Emery credit scores reflect only a snapshot in time and are obsolete the moment after they are generated. The reason becomes clear when one investigates how credit scores actually work. You may buy your score from a CRA, but the score you buy is not necessarily the same score presented to a credit vendor. Congress was aware that the multitude of scores available to creditors had potential real world impacts on what credit was available to consumers. They ordered the new Consumer Financial Protection Bureau (CFPB) to look at the credit score mechanism and report their investigation back to Congress. The second of two reports on Credit Scores was delivered to the Congress in September 2012. TransUnion’s Emery says that the best way to assure your credit worthiness is to pay your bills in a timely manner over a long period of time. If you are in the 95 percentile of good borrowers on one report, you will likely be in the same percentile on others. For the most part, this is true, but the federal government reports up to 27 percent of consumers are downgraded by at least one lending category because the score they purchased does not match the score their lender has received. Few people are aware that the multiple scoring models even exist. Both Bankers and Bankruptcy attorneys quiered by Examiner were unaware. The scores that individuals purchase from the CRA are deemed “educational scores." Other available scores are generated from complicated secret formulas that answer specific concerns of lenders. The CFPB analyzed 200,000 credit reports and their attendant scores. A majority of Americans showed a consistent result. For a substantial minority, however, different scoring models can gave meaningfully different results. “Consumers should not rely on credit scores they purchase exclusively as a guide to how creditors will view their credit quality,” said the CFPB. A new initiative by the Fair Issac Company (FICO) makes the results of at least one of their scoring available for FREE. Why FICO has announced this new move and how the scores are calculated will be covered in a follow-up column.
January 12, 2014