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Toward Fiscal Fitness: A Critical Examination of “Free” Credit Scores

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The “free” credit score is a myth. Your report is indeed free—you’re entitled to one from each of the three major credit bureaus each year, through AnnualCreditReport.com—but your score is not, even though it’s often advertised as such. The only time you’ll receive a “free” score is when you’re denied credit, the cost of credit increases, or you apply for a mortgage, among other reasons.

There are plenty of websites out there that purport to offer “free” scores, but those claims aren’t completely true. These companies offer subscriptions to their credit-monitoring services, and you’re charged on the month. You can, however, sign up and then terminate your subscription while still in the free trial mode and avoid the monthly charge. Here are two possible sources and the amount of time you have to cancel:

Name Monthly Fee Grace Period
TransUnion $19.95 7 days
GoFreeCredit.com $16.95 30 Days

No one “true” score

That “free” credit score is also multiform: there are in fact dozens of scores, all offered by an array of companies. FICO is the most popular company, the one lenders use most to see if they can rely on you making payments.

And even FICO is multiform, and it gets a bit convoluted from here. There’s an Equifax FICO score—Equifax being one of those three major bureaus—as well as a myFICO score from Equifax, and even those two figures can vary.

The difference between those scores, while often small, can sometimes have an effect.  When you apply for a loan, your lender checks your score, and they might use one of your lesser scores. Your scores might also straddle two brackets—“Fair” and “Good,” for example. And the former will lead to higher interest payments than the latter, no matter if the scores are just a couple points apart.

A flawed system that needs correction

This system, clearly, is not perfect. The most obvious reason: it’s an industry.  The scoring companies are looking to make a buck—with those subscriptions to their credit monitoring services—as are the lenders themselves—with higher interest rates. The relationship between those two—scorer and lender—is tight: scoring agencies compete for lenders’ favor, and they’ll bend over backwards for the business. These agencies therefore all try to offer the most comprehensive model that will predict consumers’ ability to pay back loans.

Scorers’ relationship with consumers is far less close. Their practices often aren’t transparent: you don’t know who is going to use what score, nor do you know if the information that scorers collect is even correct.

“As it stands now, credit agencies can inaccurately report derogatory credit against you, and if that causes you economic harm they are not held accountable in the courts of law,” said David Donhoff, a certified mortgage planner at Leverage Planners.

Were protections in place, lenders would have more incentive to take care of consumers. “Good regulations and law would allow consumers easier legal recourse against inaccurate reporting or sloppy data maintenance,” Donhoff said. And so he suggests the following: Codify inaccurate credit reporting as “tortious libel” in courts of law, at full recourse. “Watch how fast the reports become pristine, and agencies push the costs of compliance back upon the buyers of their services!” he said.

Government regulations are expanding

To accommodate consumers, federal agencies like the Consumer Financial Protection Bureau are putting in place protections and statutes that require full disclosure.  The Fair and Accurate Credit Transactions Act, for example, passed in 2003, requires that these scoring companies, that offer “free” services, disclose “conspicuously”—in other words, up front and not in the fine print—the terms of their services, including the cost to you. The act also made possible AnnualCreditReport.com, the aforementioned website that gives you three free scores per year.

  • Katie

    annualcreditreport.com does not give you any scores, but rather the report from each of the bureaus.

  • http://twitter.com/CredSimplicity Credit Simplicity

    Great article!

  • http://www.LeveragePlanners.com/ David Donhoff

    This author quotes the most amazing experts!!! ;)

  • Pingback: Latest Free Credit News | Credit Report

  • Kahuna, CFA

    Credit reporting long, long ago used to be, to use a phrase from “The Islands” More Better when credit reporting was more local with the local County Credit Bureaus. The County Credit reporting gave consumer direct access to the officials responsible for collecting as well as reporting the data. If errors were discovered, it was totally possible to pay a friendly visit to the local county credit office and in a friendly, responsible way confront the office and the reporting agency. Under those conditions you better believe that the information in the credit files was up-to-date and, of course, more accurate. If it was not, then a trip to the local county courthouse, with or without an attorney was very easy to accomplish.

    Kahuna, CFA
    Venture Capital
    Founding General
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