Ever since the financial crisis of 2007, consumers have become more interested in educating themselves about financial well-being. Almost every day Americans run into an influx of advertisements offering credit scores and education, yet a lot of confusion still remains on the subject. If there is a demand for this information, and a lot of credit education is available, why is it that 4 out of 10 Americans still don’t know how their credit scores are determined?
Part of the reason is the confusion around the different credit score models. A recent survey by NerdWallet and Harris Poll found that only 9% of Americans know they have more than one credit score. People often talk about their credit score as if they only had one, not realizing that there are different credit score models using different formulas to calculate someone’s credit scores. With so many credit score models being used to determine consumer creditworthiness, it is no wonder people are confused on how credit scores are calculated.
This is significant because, although there are different credit scoring models, they don’t all carry the same weight with lenders. In fact, 90% of lenders use FICO® Scores, according to Fair Isaac Corp. And this can lead to confusion with consumers as, according to a BAV Consulting Survey, 62% of consumers who received credit scores that were not FICO® Scores mistakenly believed they had received FICO® Scores.
Know What Credit Score Model Your Lender is Using
Given that these credit scores are not FICO® Scores and carry a different value, they can lead to misinformed credit-related decisions. A report by the Consumer Financial Protection Bureau (CFPB) on the differences between consumer and creditor-purchased credit scores explains that consumers can be harmed if their impression of their creditworthiness doesn’t match that of a lender.
“If… the consumer obtains a score that makes him or her believe he or she is a worse credit risk than lenders would believe, the consumer may apply to lenders that offer less favorable terms,” the CFPB reported. “The consumer may apply for or accept loans with higher interest rates, for lower amounts, or with otherwise worse terms than other loans for which the consumer would qualify. In addition, consumers who believe they are worse credit risks than they are may not seek out credit that they would benefit from and could qualify for, believing they would be denied or that the credit would be too costly.”
To help avoid this problem, make sure the credit score model you are basing your decisions on is the same one your lender is using. And if you are looking for FICO® Scores, make sure your credit report specifically says FICO® Scores. For more information on how FICO® Scores are calculated, check out What is a FICO® Score? Why is it Important?