Government study finds consumers and lenders use different credit scores

This week the Consumer Financial Protection Bureau (“CFPB”) released the results of a study, which revealed that one out of five consumers are likely to receive a meaningfully different credit score than a lender would receive. The CFPB analyzed credits scores from 200,000 credit files from each of the three major credit reporting agencies: TransUnion, Equifax, and Experian. Several notable issues were found.

First, the score a consumer receives when she purchases her score from a credit bureau may be quite different from the score a lender would consult when making a credit decision. The difference in score is significant enough that the consumer ” would be likely to qualify for different credit offers – either better or worse – than they would expect to get based on the score they purchased.”

Second, this discrepancy may cause harm because it could cause a consumer to take an action that is not in his or her best interest. For instance, a consumer who believes he has a higher credit score than he actually has may expect a certain rate from a lender and waste time and effort applying for a loan that he has no real chance of getting. Or, if the lender receives a higher credit score than a consumer sees when she purchases his credit score, an unwitting consumer could accept an offer from a lender that is worse than what she could have gotten.

Third, at this point there is no way for a consumer to know what score a creditor is using when it makes a lending decision.

The CFPB issued the following advice to consumers in evaluating the credit score they receive:

“Shop around for credit. Consumers benefit by shopping for credit. Regardless of the scores different lenders use, they may offer different loan terms because they operate different risk models or face different competitive pressures. Consumers should not rule out of seeking lower priced credit because of assumptions they make about their credit score. While some consumers are reluctant to shop for credit out of fear that they will harm their credit score, that negative impact may be overblown. Inquiries generally do not result in a large reduction in a consumer credit score.

Check the credit report for accuracy and dispute errors. Credit scores are calculated based on information in a consumer’s credit file. Inaccurate information may be the difference between a consumer being approved or denied a loan. Before shopping for major credit items, the Bureau recommends that consumers review their credit files for inaccuracies. Each of the nationwide credit bureaus is required by law to provide credit reports for free to consumers who request them once every 12 months.”

The Bureau will begin supervising consumer reporting agencies as of September 30, 2012. The CFPB’s supervisory authority will cover an estimated 30 companies that account for about 94 percent of the market’s annual receipts. The Bureau’s examiners will be looking to verify that consumer reporting companies are complying with federal consumer financial law, including that the companies are using and providing accurate information, handling consumer disputes, making disclosures available, and preventing fraud and identity theft.

The complete CFPB analysis in PDF form is available here.