Why it’s a WASTE OF MONEY paying for your credit score

The last time I applied for credit was in February of 2008 when I obtained a home equity loan for my rental property (thank goodness that loan is history).  Anyway the credit union (after I requested the three major credit reporting agencies temporarily lift my security freeze) obtained a credit score from TransUnion (I believe).  My score was good enough to obtain that home equity loan at the best available rate [since the condo is a rental property, the higher “commercial” rate applied].

During this process the loan officer told me my score.  It was above 800.  I was excited initially until I discovered TransUnion uses a different scale than the familiar FICO range of 300 to 850.

Earlier this week I received the November 2010 issue of Consumer Reports Money Adviser.  On page 5, toward the bottom right of the page, there is a box entitled, How will you be scored? The contents of this box follows.

Here’s one more reason it pays to shop around for loans and insurance: Lenders and insurers use different credit-scoring systems to judge your creditworthiness, and some view you in a better light than others.

“FICO scores are the credit scores most lenders use to determine your credit risk,” boasts the website myFICO.com, which sells a consumer version of FICO scores at $15.95 a pop.  What myFICO doesn’t tell you is what Judy Wooding, a FICO senior scoring consultant, told us two years ago: Lenders often base their decisions on specialized FICO credit scores that you can’t buy or see, and they produce different results than the scores consumers pay for.

For example, mortgage lenders usually buy FICO Mortgage Scores, while auto-finance and credit-card lenders use what’s called proprietary Industry Option FICO scores.  Those scores give added weight to how you’ve handled certain types of loans  and are tailored to the needs of those creditors.  Next-Gen FICO scores are used to qualify subprime customers, and FICO Expansion scores use data from sources other than credit bureaus to rate people with no credit history.  The scoring scales for those other models, ranging from 150 to 950, are also different from the basic FICO range of 300 to 850, which consumers rely on.

To complicate matters further, some big lenders, such as auto-finance companies, have developed their own scoring formulas, and big insurers use their own credit-based insurance scores.  Still other companies sell consumers Vantage scores, PLUS scores, TransRisk scores, and CreditXpert scores.

The bottom line: Don’t rely on any single credit or insurance score as the definitive measure of your creditworthiness.  But don’t buy all the scores you can get your hands on.  You’ll determine your true credit standing for free when you shop multiple lenders and insurance premiums.  The companies that charge you the lowest rates are the ones using scoring formulas that work in your favor.

This is worthwhile information.   So, the credit reporting agencies sell you a credit score, which essentially, is USELESS information, since the lender relies on a specialized FICO score that the consumer cannot buy or see.

Thanks for the information, Money Adviser.  But, I differ with your bottom line.

I recommend individuals obtain a free copy of their credit report from three major credit report agencies annually.  You want to make sure the information about your various accounts is reported ACCURATELY.  If you have filed for bankruptcy or have had a judgment entered against you or have had your house foreclosed or sold your home “short sell”, this “information is viewed negatively and will cause your score to drop.  If you are habitually late in paying your credit card bills or have had several lines of credit sent to collection agencies, also expect a lower credit score.

But don’t SPEND money to obtain your credit score.  Based on your credit report, you should have a good feel about your likely range of a score.

I personally believe the SMARTER move is, when you apply for a line of credit, you REQUEST a copy of the credit report the lender obtained.  That credit report will contain that “specialized FICO score.”  And if the lender protests, remind the lender that you PAID FOR THAT REPORT and thus are entitled to a copy.

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