The Hidden Credit Scores That Could Sink Your Finances

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Credit ScoreIf you're a little savvy about credit, you probably know that each of us is entitled to a free copy of our credit report, once a year, from each of the three main credit-reporting agencies. (You can access these easily online at annualcreditreport.com.) And if you're willing to pay a few dollars, you can get your credit score, as well.

That's great, but according to our new national financial watchdog, the Consumer Financial Protection Bureau, credit scores vary widely, and the ones you're given may be very different from the ones lenders and other businesses actually use.

Because your credit score is used for much more than just predicting how reliable a borrower you'll be (potential employers and landlords check it, as do some utility companies, insurers, and even car-rental companies), a poor score can doom you to steep interest rates and even outright rejections. It can cost you tens of thousands of dollars, or more.

Big Numbers, Big Costs

The CFPB looked at 200,000 credit records from each of the three main credit-reporting agencies: Experian, TransUnion, and Equifax (EFX). Each agency uses its own algorithms to calculate credit scores, and each one actually has more than one way to do so.

Meanwhile, the Fair Isaac company also computes credit scores, and it alone has more than 49 models. (Its scores are the most well known, dubbed "FICO" scores.)

All that complexity might be OK if it didn't result in wide variations. But wide variations are exactly what the CFPB found.

The good news is that most results -- 73% to 90% -- were relatively consistent: If you receive a high score from a model used to generate a score given to consumers, you'll most likely also get a high score with a model used to generate scores for lenders. But not always.

Between 19% to 24% of the time, consumers would get a score different enough to bump them into the next score category -- potentially a worse one. And the remaining 1% to 3% of consumers would receive credit scores that differed by two or more score categories.

The $50,000 Difference

How much of a difference does it really make if you end up in one category versus another? Here's some information, from the horse's mouth: The FICO website offers a handy calculator that lists the different typical interest rates offered to different FICO score categories.

Below are national average interest rates for someone seeking to borrow $150,000 for a 30-year, fixed-rate mortgage:

  • FICO score of 760-850: 2.889%
  • FICO score of 700-759: 3.111%
  • FICO score of 680-699: 3.288%
  • FICO score of 660-679: 3.502%
  • FICO score of 640-659: 3.932%
  • FICO score of 620-639: 4.478%

When it comes to interest rates on long-term loans, seemingly small differences can add up to big money. For example, the best category above results in a monthly payment of $623, while the worst category demands $758. That's a difference of $1,620 per year.

But look at the lifetime interest paid on the two loans, and the dollars really add up: The best category leaves you paying a total of $74,446 in interest, while the worst category will eat up $122,905 in interest -- a difference of $49,459. Even the difference between the best category and the next-best one will cost more than $6,000 in total interest paid.

Some small differences in credit scores can cut you off from a mortgage entirely. According to the CFPB report: "Fannie Mae generally won't buy mortgages with FICO scores under 620. So, for consumers whose scores are in the relevant range, a small variation in a consumer's score might result in his or her score falling above or below such a cut-off, with dramatic implications for his or her access to home loans."

What to Do

The CFPB study shows that you shouldn't put too much stock in any credit score you might purchase. It might be significantly different from the one a lender or other business is given. That said, consumers are not totally powerless in this situation.

What you can -- and should -- do is request your free credit reports each year from annualcreditreport.com, and review each closely. It's far from uncommon for them to contain errors, which you can ask to have corrected. Remember that those very influential credit scores are based on information in your credit report. Here's one weighting, from FICO:

  • 35%: Your bill-paying history
  • 30%: How much of your available credit you've borrowed against
  • 15%: The length of your credit history
  • 10%: The variety of credit you carry
  • 10%: The number of "hard inquiries" from creditors (such as when you try to take out a loan or open a new credit card account)

An ideal credit report will show a long history of on-time payments on a variety of debt (such as a mortgage, car loan, and/or credit cards). It will also reflect that you haven't been maxing out your available credit and that there haven't been lots of inquiries on your account lately. Much of this is under your control, and over time you can build a strong credit history that results in high credit scores.

Even if the credit score you're given isn't so hot, remember that the lenders or businesses you're dealing with might have been given a significantly different one for you, and possibly a higher one. It can pay to shop around, and not resign yourself to unattractive terms.

The variation in scores isn't great news overall, but it could work in your favor.



Longtime Motley Fool contributor Selena Maranjian, whom you can follow on Twitter, holds no position in any company mentioned.


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July 15 2013 at 4:12 PM Report abuse rate up rate down Reply
ilm9p

Credit is for fools! Why go into the hole when you can get everything for free? Just do what all the dirty animals who make a career of being on welfare do in this Country. I’m talking about the filth that sits around all day in free Section 8 housing, with free utilities, free Cable TV, free phones, free food, and free healthcare, all the while breeding like rats with 4 or 5 children each sired by a different father. Then when this spawn gets old enough they send them to school to get free breakfast, free lunch, and free school supplies, only to get pregnant at 14 and start the process all over again. Vermin, absolutely worthless human trash that provides nothing of value to society whatsoever, and all us hard working slobs just trying to get by are paying for it. Enough is enough! Let's all do it.

October 08 2012 at 11:35 AM Report abuse -1 rate up rate down Reply
jennyboka

A footnote to the end of this article: WATCH HOW YOU SHOP AROUND!!!

Shopped around for my mortgage and the one I finally went with would not give me the loan unless I explained all these recent "inquiries" into my credit history. It took me writing a full page letter, describing to whoever needed to know that I was trying to be a "smart consumer" by shopping around for the best mortgage lender, and that all of those recent listed inquiries were likely other lenders who I had asked to give me a Good Faith Estimate on the house I'd decided on as my first home.

My originator then explained to me that they see that as you very well may be opening new credit accounts to make your credit appear larger than it is, and that that is a common thing they look for before giving out a loan. He also explained that it is best not to open any new credit accounts within at least 3 months (before or after) you apply for a mortgage.

Just an FYI for anyone looking to purchase something "big" in the next few years.

October 08 2012 at 9:52 AM Report abuse +1 rate up rate down Reply
1 reply to jennyboka's comment
vlady1000

It is best to know your credit score before talking to any mortgage companies. Then explain to base the GFE on the score that you give them and expalian why you do not want them to pull a credit report. If they say they can not give you a GFE without running a report, then walk away.

October 08 2012 at 10:44 PM Report abuse rate up rate down Reply
vocalist

Like virtualoly every other financial entity, credit bureaus are run by social crimminals. I have perfect payment records, and simply because I paid 60K instead of 100K to settle with the credit cards my ex ran up before the divorce, I lost about 100 points.....well, I paid cash, mno payments....on a program that is supposed to be honorable.......no my score is 618.......but I have 3 back to back car loans, all on time, I have 2 american expresses on time for 20 yrs.....and they continue to penalize me for a credit inquiry? Fricken corrupt pigs

October 08 2012 at 8:57 AM Report abuse +1 rate up rate down Reply
A.G. SESKIS

The SAD part is ,...ALL these credit rating agencies use stupid equations / computer predicted BS, to determine your life !!
Also record FALSE INFO, and manipulate all the BS numbers to justify the reason they even need to exist !!!!
How the hell does the FALSE info recorded by these crooks determine REALLY what type of individual you REALLY are ??? By stupid manipulated falsified numbers ??? What about the U.S.A ? Cant pay a damn bill without going into a " crisis mode " to even balance a simple day to day budget,..why the hell does the U.S.A. allowed to keep borrowing more money while being over $ 15 TRILLION in debt to the WORLD,..but yet,...WE THE PEOPLE get screwed for " small change " and incorrect info,...we have to PROVE our selves INNOCENT for false info that these crooked credit rating companies who falsely put info against us,...we are the crooks????
NO,...OUR CREDIT REPORTING AGENCIES NEED A MAJOR MAKE OVER,..AND STOP DOWN RATING EVERY U.S.A. CITIZEN , FOR A PROFIT !!!!!!
TIME TO CHANGE THE WAY THE BS WORKS ,..BECAUSE ITS FALSE ,..AND WHY DO WE NEED TO GO THROUGH SO MUCH BULLSHIT TO PROVE OURSELVES FOR THE CRAP THEY REPORT ??
My azz ,..the report DOESNT show how reliable / hard working of an individual I am,...and can be "counted on " , etc. etc,.
And because of the Financial Clowns of both Wall St. and D.C. ,...( which many of them cant even balance their own checkbooks ) ,...but if " We the People ",..DONT balance ours ,..we are PUNISHED ????
BULLSHIT !!
And yet this Country, the Great U.S.A,..is over $ 15 TRILLION in DEBT,...but can STILL BORROW MONEY JUST TO PAY MONTHLY BILLS,........** BUT ** ,..." We the People " are put into a " BAD " status,.. ( cant lend US money ) ,...now how crooked is this so called " credit system " ????
It`s violating !!!! And unjust !! Crooked / false /etc /etc. !!
OUR CREDIT RATING SYSTEM IS A *** JOKE *** AND NEEDS CHANGED ,..JUST ON THE SIMPLE FACT OF DISCRIMINATION !!!! By that I mean,..if BIG BUSINESS,..." who are too big to fail " ,..can borrow BILLIONS for BS / crap azz phoney investments,...then way is every LEGAL TAX PAYING U.S.A. CITIZEN held to higher standards that our own Govt. , who has to borrow money from CHINA just to pay the electric bill ??? !!!! HOW SICK IS OUR SYSTEM OF CREDIT ??????
Point is ,..our sick credit rating industry needs out out of business ,..when they are allowed to downgrade every US Citizen for chump change,..while our Govt.,...who is supposed to work for US,..keeps getting loans while being over $15 TRILLION in debt ,...deosnt even make the 1st amount of common sense to me ,..we are being screwed ,..and time for a change ,..simple as that,..our " so called " credit rating system is just plain BROKE,..and violates why we are here as a NATION !!
We the People need to STOP the bullshit credit rating system ,...plain and simple !!!!

October 08 2012 at 5:19 AM Report abuse +3 rate up rate down Reply
Jo

The sickest part of this is that lenders can bump you into any category they chose because higher interest rates for them mean more money in the lender's coffers and out of your pcket.

October 08 2012 at 1:21 AM Report abuse +2 rate up rate down Reply
Trajan Saldana

credit reports, credit ratings, credit cards....credit, credit, credit....incredible how gullible and docile people actually are...and even moreso uninformed and blind

October 07 2012 at 6:32 PM Report abuse rate up rate down Reply
ATM

Cancel all credit cards, stop making payments to card companies, and live on your cash alone.

The card companies are worse than drug dealers and they want you to be in debt your whole life -

The credit scoring system is a bunch of crap and only discriminates in a totally biased manner that faovrs banks.

The credit scoring system is filled with conflicts of interest, and they get their money from banks and financial institutions - it is in their interests to make cost of credit expensive, as it rewards their customers- the banks and financial institutions.

October 07 2012 at 11:36 AM Report abuse +2 rate up rate down Reply
ATM

If the Government had any balls, they would shut down the credit reporting agencies,

They are frauds- the credit card companies lowered credit limits unilaterally, and the consumer credit scores wen tdown as a result - there are REAL damages, and the CFPB needs to eliminate the use of credit scores for consumers.

The Wall Street firms were the most abusive and least credit worthy, and they received access to money at the lowest cost of capital in history -

the creditr scoring system is used to discriminate and to prevent consumers from receiving fair access tomoney.

I am a banker and investment professional, and am appalled at the financial system of fraud in our country.

October 07 2012 at 11:34 AM Report abuse +2 rate up rate down Reply
vieragam

NO ONE has to pay for a credit score. Use Credit Karma....excellent FREE choice and accurate.

October 07 2012 at 11:26 AM Report abuse +2 rate up rate down Reply