The national credit card delinquency rate is currently at its lowest in 17 years, indicating a clear effort from consumers to be more financially responsible. This is further underscored by data from a recent analysis by TransUnion, which reveals that consumers cleared around $72 billion more in credit card payments than they spent on new purchases in the period between the first quarters of 2009 and 2010.
As part of adopting a more responsible approach to dealing with credit, numerous consumers are proactively monitoring their credit scores to gain a more transparent view of their personal financial standing. Consequently, the business of selling credit scores is thriving, contributing to over $1 billion in yearly revenue through consumers purchasing scores and reports.
Despite the consumers’ self-education efforts, there is still substantial misunderstanding about the determining factors for a credit score. Many people are still unaware that individual factors such as income, age, and marital status do not influence credit scores.
A recent report by the Consumer Financial Protection Bureau (CFPB) titled “The Impact of Differences Between Consumer- and Creditor-Purchased Credit Scores,” highlights that the credit score available to consumers may significantly differ from the one that a lender uses to evaluate credit eligibility.
In fact, the CFPB abundantly states that some credit scores marketed to lenders are not available for consumer purchase. Presently, there is a range of scoring models used by top credit agencies like Experian, Equifax, and TransUnion. These models often generate “educational scores” which are either infrequently used by lenders or not used at all.
The most crucial credit score for consumers to be aware of is their FICO (Fair Isaac Corp.) score, an evaluation criterion 90% of banks use. Yet, it is important to remark that even Fair Isaac uses an array of scoring models in their assessments.
A potential pitfall for consumers purchasing an “educational score” is the discrepancy between the perceived credit score and the actual credit score. This disparity can affect their loan and mortgage interest rates and the type of credit card offers they receive, including rewards cards, low-interest cards, or Visa credit card offers.
Under the Dodd-Frank financial reform law, lenders are obligated to present all loan applicants with a free copy of their credit score if they are outrightly denied a loan. If a borrower is given a higher rate than the primary rate offered to top customers, lenders must give a free copy of the credit score. The score must be identical to the one used in their decision. All contributing factors that influence the score and its comparison to other scores must also be explained to the consumer.
