Consumers
May Be Unaware of Variety of Credit Scores Available
WASHINGTON – The Consumer
Financial Protection Bureau (CFPB) released a
report
today examining the differences between credit scores sold to consumers and
scores used by lenders to make credit decisions.
“The
consumer bureau’s mission is to bring transparency to the consumer financial
markets so families can compare products and choose the ones that are right for
them,” said Elizabeth Warren, Special Advisor to the Secretary of the Treasury
on the CFPB. “One way consumers have tried to empower themselves is by knowing
their credit scores. We are assessing whether purchasing a credit score
provides a consumer with the information he or she needs. ”
The
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) required
the CFPB to study the differences between credit scores consumers purchase and
those creditors use to make credit decisions. The CFPB’s report covers the
process of developing credit scoring models, why different scoring models may
produce different scores for the same consumer, how different scoring models
are used by creditors in the marketplace, what credit scores are available to
consumers for purchase, and ways that differences between the scores provided
to creditors and those provided to consumers may disadvantage consumers.
Consumer
reporting agencies (CRAs) compile and maintain files on consumers that are used
to produce credit reports. Credit scores are numerical summaries of the
comparative credit risks of default; they are calculated based on information
contained in credit files and credit reports. These scores are important
because they are used to make credit-granting decisions, to identify prospects
for credit offers and solicitations, to make decisions about raising or
lowering credit limits on credit cards, and to set terms for mortgages or other
loans, among other uses.
While
most credit scores are purchased by lenders and other users to assess
consumers’ credit risk, consumers can also purchase credit scores when they
obtain their free annual credit reports, when they request copies of their
credit reports directly from CRAs, or when they enroll in “credit monitoring”
services that offer credit reports and scores for a monthly subscription fee. The
credit scores available for purchase by consumers may vary from the score used
by a lender for a variety of reasons, including:
- Use of different
scoring models;
- Lenders and consumers
may not use the same CRA;
- Data in the consumer’s credit reports change between
the time the consumer purchases a score and the time the lender obtains the
score;
- A consumer and a lender could possibly access different reports from
the CRA, if they were to use different identifying information about the
consumer;
The
report discusses the general lack of information about credit scoring. One
survey shows that many consumers do not know that a credit score represents the
risk of not repaying a loan. Furthermore, many consumers do not know that
credit scores they buy may not use the same credit scoring models that are most
widely used by lenders.
Consumers
who are unaware of the variety of credit scores available in the marketplace may
purchase a score believing it to be their “true” score. The most significant
adverse impact on a consumer from score differences would likely occur if the
credit scores the consumer buys give a substantially different impression of
his or her credit risk than credit scores that a lender would use.
As
a follow-up to the report, the CFPB is obtaining data from each of the three nationwide
CRAs, and credit scores from the CRAs and Fair Isaac Corporation widely used by
lenders and consumers to compare the variations between the credit scores sold
to lenders and those sold to consumers. To help educate consumers, the CFPB also
plans to post advice on its website about how to obtain and maintain a good
credit score.
The
full version of the CFPB credit scoring report can be found at http://www.consumerfinance.gov/wp-content/uploads/2011/07/Report_20110719_CreditScores.pdf