Bureaus fined for credit score confusion

51w4H0Y7W7L._SX333_BO1,204,203,200_The Consumer Financial Protection Bureau today ordered Equifax and TransUnion to pay more than $23 million in restitution and fines for deceiving consumers about the usefulness and actual cost of credit scores they sold to consumers. Regulators said the bureaus also lured customers into expensive subscriptions when people thought they were getting free scores.

The CFPB said the bureaus were selling scores without making it clear that they weren’t the FICO scores lenders typically use in their decisions. TransUnion was selling VantageScores and Equifax sold a proprietary score. (Important to note here that VantageScores are now offered for free by many sites, including my employer NerdWallet.)

Credit scoring can be complex, and people are easily confused about the different types of scores and how they’re used by lenders. For example, many people think they have one credit score, when in fact we have many, and those scores change all the time.

People often don’t understand that the scores they’re seeing aren’t necessarily the ones used by lenders. Most lenders use some version of the FICO credit scoring formula, but FICOs come in many different versions and iterations. There are different generations of FICO scores and formulas tweaked for different industries, such as credit cards or auto loans. Furthermore, the FICOs you get from one major credit bureau will differ from the FICOs you can get from the two other bureaus.
Before VantageScore, the bureaus often sold proprietary scores that were used by few, if any, lenders. That led consumer advocates to label these proprietary scores as “FAKO” scores. VantageScores definitely aren’t FAKOs, since they’re used by 20 of the 25 largest financial institutions. But they may be used behind the scenes–for marketing or testing, rather than for deciding whether you get a loan or the interest rate you’ll get.
A VantageScores can give you a general idea of how lenders might view you as a credit risk. If you’re in the market for a major loan such as a mortgage or auto loan, however, you should consider buying the appropriate FICOs from MyFICO.com to get the clearest idea of where you stand.

Wednesday’s need-to-know money news

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5 Ways to Make the 10 Years Before Retirement Count
Fattening your nest egg.

5 Frugality Pros Help You Rein In Holiday Spending
Avoiding the after-holidays sticker shock.

Average U.S. Credit Score Rises; ‘Silent Generation’ Wins Bragging Rights
The older you are, the better your score likely is.

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Deciding which insurance you need.

Q&A: Credit cards just keep coming

Dear Liz: I use only two credit cards. But I have several credit cards I never use. When the cards expire, the issuers send me new ones. I just received two more cards, with new expiration dates, which I will not use. I keep hearing that cancellation of cards results in lower credit scores. How can I cancel all the unused cards I have without affecting my 797 score, and how can I stop them from sending me new ones without my authorization?

Answer: Your issuers can continue sending you new cards until the accounts are canceled. Your “authorization” isn’t necessary once you’ve applied for the card. Some credit card companies will close an account that hasn’t been used in more than a year, but others will keep accounts open hoping you’ll start using the cards again someday.

Having several credit cards is typically good for your scores — of which you have many, by the way, not just one. But you don’t have to keep unwanted cards forever. If your scores are in the high 700s you can close the occasional credit card account.

What you don’t want to do is shut down a bunch of cards at once, or close your highest limit cards. Credit scoring formulas are sensitive to the amount of your available credit you’re using. Anything that significantly reduces the amount of available credit you have can hurt your scores.

Q&A: Credit score after bankruptcy

Dear Liz: This is just to add to your observation that credit scores tend to improve after a bankruptcy. I filed Chapter 13, which required a five-year repayment plan. At that point my score was around 640. The day of the discharge, I was able to get a car loan at 3% interest. Also, the bankruptcy dropped off my credit reports seven years from the filing date, and my scores actually dropped a good bit.

Answer: It’s pretty unusual for scores to go down after a bankruptcy drops off your credit reports. It’s possible you weren’t looking at the same type of score because there are many different formulas in use. It also could be there were other changes that happened simultaneously, such as a high balance on a credit account or an old, paid-off loan that a creditor stopped reporting.

It’s not unusual, though, for someone who completes a Chapter 13 to get a competitive rate on a loan where there’s collateral, such as an auto loan, assuming he has a job, credit score expert John Ulzheimer said.

“Debt free plus employed equals not a bad risk, especially if they put down a decent down payment,” Ulzheimer said.

Great credit is a powerful tool

Credit report with score on a desk

Credit report with score on a desk

Credit scores are a financial tool, but whether they’re a lever or a hammer depends on how good they are.

You can leverage great scores into great deals — on loans, credit cards, insurance premiums and cell phone plans. Bad scores can hammer you into missing out or paying more.

The lifetime cost of higher interest rates from bad or mediocre credit can exceed six figures. In my latest for the Associated Press, how to save thousands of dollars in interest by building great credit.

Wednesday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: Staples becomes the latest employer to start paying student loans. Also in the news: Places with the highest and lowest credit scores, why you can’t always bring your cell phone to a new carrier, and the pros and cons of paying for travel over time.

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Better than a discount on office supplies.

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wall_street_zombie_moneyToday’s top story: How to handle “expired” debt. Also in the news: Ways to avoid a disclosure catastrophe after closing on your new home, why your small business should have its own credit score, and why you should skip the extended warranty and save the money instead.

How to Handle Time-Barred Debt
Beware of “zobmie debt.”

5 Ways to Avoid a Disclosure Catastrophe After Closing
Pay close attention to the listing language.

Your Small Business Should Have Its Own Credit Score
Protecting your personal credit.

Skip the Extended Warranty and Save the Money Instead
Build a repair savings account instead.

Q&A: Free credit score? Be careful

Dear Liz: As a financial planner, I am surprised you pointed someone in the direction of paying for a credit score. Your score can be accessed at several credit sites for free. Why would you want your readers to pay for something they could get free? 

Answer: As a financial planner, you should understand that “free” is a squishy concept.

Some sites do offer free credit scores in return for your private financial information, including your Social Security number. Most of these sites are committed to protecting your information — the credit bureaus they’re working with insist on that — but the sites may use your data to market financial products and services to you. As the saying goes, if something on the Internet is free, then the product being sold is you.

Many people are comfortable with that trade-off. Others aren’t. The other and perhaps more important reason to buy your credit scores from MyFico.com is that you’ll be getting numbers created from the same FICO formulas that most lenders use. The sites handing out free scores typically offer VantageScores, which is a FICO competitor. This particular reader wanted to see the auto FICO scores his lenders would use, and for that the best source is MyFico.com.

Q&A: Where to find FICO scores

Dear Liz: I’m looking to buy a car and I’d like to see the FICO scores that lenders use. I already visited MyFico.com, but I want another site that shows my real FICO scores for auto lending. If you could point me in the right direction, that would be great.

Answer: You were at the right site. When you buy one credit score for $19.95 from MyFico.com, you actually get several scores from the same credit bureau. Those include FICO 8, the most commonly-used score, as well as the FICOs that bureau typically supplies to mortgage, auto and credit card lenders. If you want to see FICOs from all three bureaus, you can buy them for $59.85 and get a total of 25 different scores.

The scores lenders actually use to price your loan may be somewhat higher or lower from the ones you’ll see because credit scores change all the time. But if you apply for a loan shortly after buying your scores, they should be pretty close to the ones you see.

Q&A: Conflicting credit scores

Dear Liz: Why is there such a difference between my FICO 4 and FICO 8 scores? My FICO 4 score is 646 while my FICO 8 score is 678. I want to buy a home and I know some lenders may still use the FICO 4.

Answer: Most (not just some) mortgage lenders use outdated versions of the FICO credit scoring formula. The agencies that buy most mortgages, Fannie Mae and Freddie Mac, accelerated acceptance of credit scores in the mid-1990s when they made FICOs part of the underwriting required for the loans they purchased.

But the agencies haven’t authorized lenders to use the newest versions or alternative scores, such as VantageScore. So an old collection or other misstep that’s ignored by modern versions of the FICO formula could hurt your efforts to get the best rates and terms on a mortgage.

There are several ways you can boost your scores in the coming months. First, get your actual credit reports from all three credit bureaus at www.annualcreditreport.com. (You don’t need to provide a credit card. If you’re asked for one, you’re on the wrong site.) Scan the reports for errors, such as accounts that aren’t yours or late payments showing when you paid on time. Dispute those and prepare to follow up with any creditors that insist on reporting false information. (Complaints to the Consumer Financial Protection Bureau can help you get the creditors to cooperate.)

Make sure you’re making all credit account payments on time and pay down any credit card balances. Your goal is to use 10% or less of your reported credit limits, and to pay your balances in full each month. (Homeownership is expensive enough without dragging costly credit card debt into the financial picture.) It may take a few months to start seeing improvements, but they should come.

When you’re closer to pulling the trigger on a home purchase, consider buying your FICOs for all three credit bureaus from MyFico.com. In addition to the FICO 8, which is the one other creditors use most often, you’ll get your FICOs for the mortgage, credit card and auto loan industries, which can give you a clearer picture of where you stand.