By Christopher Maag
So you’ve gotten your free credit score, and you think you’re set. Now you know exactly where you stand, and you know what the credit card companies and banks are thinking about you when you apply for a loan.
Um, actually, no.
In most cases, the credit score we consumers will soon see will be totally different than the one that corporations see, according to a report published Tuesday by the government’s newest consumer watchdog agency.
Which means that in reality, you may have no idea what lenders make of your creditworthiness, even if you’ve already gone to the trouble of ordering your credit score.
[Related article: The Politics of the Credit Score]
“When a consumer purchases a score from a CRA, it is likely that the credit score that the consumer receives will not be the same score as that purchased and used by a lender to whom the consumer applies for a loan,” according to the report, which was published by the Consumer Financial Protection Bureau.
Why this difference? There’s a whole host of uber-complicated reasons, but the main ones include:
- Consumers often get “educational” credit scores—simplified versions of the many different types of scores various lenders may use—created specifically to comply with the new federal rules requiring credit scoring agencies to give consumers a free credit score every year in conjunction with a consumer’s free annual credit report. But lenders don’t use these educational scores—they buy the real thing or custom-build their own. Not surprisingly, these scores can be very different, the report found.
- Many different credit reporting agencies and data furnishers sell scores, and each issuer often sells many different types of scores.
- For each type of score, there are just as many different scoring models. And this doesn’t include the custom scoring models with custom scores that some large lenders develop in house for their business models. Each score is produced using a different scoring algorithm. Even if you get a score once a year, there’s no guarantee that your lender is looking at the same one.
- A year is a long time. If you had a good credit score 11 months ago, there’s no guarantee you still have it today. So while you’re still looking at your old score, lenders are looking at the new one.
[Related article: How the CFPB Should “Regulate” Credit Reporting and Credit Scoring]
Confused yet? Who wouldn’t be?
The best advice? Stick to the four golden rules for managing your credit and the numbers will work themselves out:
1. Always pay your bills on time.
2. Keep your debt balances as low as possible, especially on your credit cards.
3. Open new accounts sparingly.
4. Only apply for credit when you need it.
Taking the opportunity to get your free annual credit score is a good idea, since it gives you a rough idea of where you stand. But the federal government says: Just take it with a bag full of salt.
Christopher Maag is Credit.com’s Staff Writer. Chris graduated with honours from the Columbia University Graduate School of Journalism, and has reported for a number of publications including The New York Times, TIME magazine and Popular Mechanics. Reach Chris via email at chris (a) credit.com.