Americans just about everywhere agree that this country’s credit reporting system is essentially impenetrable. In an effort to help, nearly two decades ago Congress declared that consumers had the right to receive a free copy of their credit reports each year (via AnnualCreditReport.com). But what we’re not allowed to see are the actual grades derived from these reports – it’s the equivalent of passing our homework without a grade at the top.
These reports are compiled by the three major credit bureaus: Experian, TransUnion and Equifax. But credit scores are calculated by a different set of companies, using models that each claims to improve. An entire industry has emerged in an attempt to close this gap, full of companies promising not only to give consumers access to the scores lenders rely on, but also to launch personalized financial advice that will help boost those scores.
However, a new review of these services by Consumer Reports suggests otherwise. Looking at five of the biggest apps that provide this service (Credit Karma, Experian Credit Report, Credit Sesame, myFICO, and TransUnion: Score & Report), the report claims that the scores they give you aren’t very helpful â€” and, even worse, many of them routinely ask customers to apply for additional credit or purchase new financial services that, as Consumer Reports puts it, “are not necessarily in the best interests of users.”
He notes that Credit Karma, Credit Sesame, Experian and TransUnion only give customers access to one credit score, and the odds are slim that’s the one lenders are looking at. This is partly because, as even Credit Karma has recognized fast business, “there are dozens, if not hundreds, of scoring models.” The one chosen by Credit Karma, Credit Sesame and TransUnion is called VantageScore. Scores by his rival, FICOhave been around the longest and are considered the industry standard, which Consumer Reports says means anyone’s numbers are “unlikely to be the scores lenders use to make lending decisions.”
But that can’t illustrate the larger problem of how incredibly disparate the system is. Are you applying for a mortgage loan? Lenders will almost certainly look at your classic FICO score. (It’s the only model that gets approval from the Federal Housing Finance Agency, or FHFAâ€”for the moment.) Apply for a car loan? There are industry-specific scores for auto lenders formulated to better predict your likelihood of paying off an auto loan on time. FICO fact one of those, but so is TransUnion, even though its app uses VantageScore. In fact, it offers auto lenders not one but of them scores: TransUnion Auto Score and TransUnion CreditVision Auto Score.
(Meanwhile, the Experian app uses FICO, but only one score – FICO 8, as generic as possible – greatly reduces its use. Only the myFICO app gives users access to all their FICO scores, but it gives them access to all their FICO scores. bills $24.99 per month.)
The irony is that while FICO scores appeal to banks and other lenders, VantageScore was created by the three credit bureaus after critics argued that FICO’s scoring model could do more to include marginalized and disadvantaged communities. ‘others “invisible creditsthus addressing America’s racial wealth gap. In a statement to fast business, Credit Sesame said its use of VantageScore was intended to initiate a shift towards a more inclusive financial services industry. VantageScore “brings credit scores to a wider range of consumers,” a spokesperson told us, including those who are “deemed ‘impossible to rate’ by other models â€” consumers who are new to credit, who have thin credit records or who are invisible to credit”.
TransUnion also quibbled with Consumer Reports’ suggestion that lenders rarely use VantageScore. Millions of loans are underwritten each year using it, a spokesperson said, adding, “Nine of the ten largest U.S. banks and one-third of the largest credit unions all use VantageScore to make lending decisions for some of their products.” The company also said that since the start of the pandemic, it has made credit reports free every week for anyone who wants one, going beyond the law once a year.
However, this kind of understates these companies’ explanation as to why it’s okay that fewer lenders are using VantageScore. “What’s important is that credit scores are highly correlative,” a Credit Karma spokesperson told us. “This means that if you are rated ‘good’ in one rating model, you most likely have a ‘good’ credit rating in all other models.” Again . . . FICO’s model was so flawed that VantageScore had to be created?
According to Consumer Reports, the hardest pill to swallow is that to get that possibly useless score, you need to give these companies something very valuable to them: your data. These apps all partner to varying degrees with outside companies because their business models depend on them (especially that of Credit Karma, which is now managed by Intuit and was built around free credit ratings).
Either way, affiliates interested in this particular clientele are usually lenders, insurance companies, and financial service providers. According to Consumer Reports, that means people trying to be more tax-savvy could find themselves bombarded with offers that don’t help â€” and potentially even hurt â€” their financial situation, and that’s technically coming from a app they downloaded to improve their credit scores. .