Settling the credit score

Having a good credit rating is more important now than ever, but determining exactly what yours is gets complicated.

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NEW YORK (CNNMoney.com) -- Times are tough, and understanding your credit score is crucial to financial survival. But knowing your score and getting access to it isn't so easy.

Credit scores affect everything from rates on mortgages and car loans, to credit card terms and even whether you get a job. Lenders use them as an indication of how likely you are to repay a loan. The most widely used credit score is known as FICO, which ranges from 300 to 850. Credit scores change over time, depending on your credit history, which is explained in your credit report.

In recent years consumers have had the ability to access one free credit report a year. But getting an accurate reading of your credit score remains problematic and costly.

With loan delinquencies and foreclosures more common, lenders are tightening their standards and that means that a low score can prevent you from getting access to credit, and you'll need an even higher score to qualify for the best interest rates.

Last week, the House Subcommittee on Oversight and Investigations took up the discussion in a hearing to examine credit scoring and whether consumers are granted fair access to their own three-digit numbers.

Coughing up cash for credit scores

Thanks to the Fair and Accurate Credit Transactions Act, or FACT Act, enacted by Congress in 2003, consumers can get one free credit report a year from the three major agencies - Equifax, Experian and TransUnion. But that doesn't include scores, which come at an added cost of around $6 to $16. That's the "fair and reasonable" fee credit rating agencies can charge consumers under the legislation.

Some consumer advocates argue that scores should be free too, and included in the free annual credit report consumers are entitled to.

But the credit rating agencies argue that it costs them money to compile and maintain those scores, and lawmakers should not interfere with their ability to sell credit reports and credit scores at a profit.

If legislation were proposed that mandated giving consumers a score along with their annual free credit report, that would be "legislating revenue right out of my pocket," said Steve Ely, president of Equifax.

According to Ely, Equifax makes $154 million a year from selling credit reports, credit scores and credit monitoring products to consumers.

Evan Hendricks, editor of Privacy Times and author of "Credit Scores and Credit Reports: How the System Really Works, What You Can Do," argues the credit rating agencies could still maintain a profitable business, just as they did after the FACT Act mandated that they give annual reports away for free.

Originally, Hendricks said, the credit rating agencies fought the free credit report legislation but now "they're selling more reports than they are giving away for free." The credit rating agencies argue that is not the case.

"I would dispute that considerably," said Ely.

"We do give away significantly more free credit report disclosures than the reports that we charge for," confirmed Steven Katz, a spokesman for TransUnion.

Hendricks also argues that consumers pay $5.95 to $15.95 to see their credit score while lenders buy those scores from the credit bureaus for less than a dollar. Ely counters that business-to-business customers buy in large volumes, and therefore get a discount.

FICOs, FAKOs and so on

Another issue up for debate is the number of different kind of credit scores out there, often confusing or misleading consumers. FICO, the scoring system devised by Fair Isaac Corp., is the one most commonly used by lenders in determining consumer credit worthiness.

But some credit rating agencies sell "educational scores," sometimes referred to as "FAKOs," (as in a fake FICO score) that are similar to FICO scores, but can differ by up to 20 points or more.

So consumers who purchase scores directly from one of the three credit agencies might not be seeing the same score that lenders are using.

While Equifax sells FICO scores, Experian offers their own proprietary PLUS Score and TransUnion sells a "Vantage Score," another variation on the FICO scoring system created by the three credit bureaus. Vantage Scores range between 501 and 990 and includes a letter grade, which can help consumers gauge how they rank compared to others.

"Accordingly, Congress needs to act to bring the appropriate level of transparency and fairness to credit scoring," Hendricks said in his testimony before the subcommittee.

"People don't realize that the credit score they are buying isn't the score used by lenders," Hendricks said. "At a minimum, fundamental fairness dictates that sellers of knock-off scores clearly and conspicuously disclose that their scores are not used by lenders and may differ significantly from the ones that are."

Stuart Pratt, president and CEO of the Consumer Data Industry Association, the credit reporting agencies' trade association, said that consumers can't get a free credit score with their annual report precisely because there is no single universal score.

Further complicating matters, some lenders devise their own scoring systems in addition to using the ones provided by the credit agencies.

In written testimony before the subcommittee, Jack Forestell, vice president of marketing and analytics at Capital One Financial Corp. said "Capital One uses a blend of internally derived and externally available consumer data to develop its own credit scoring models."

Steven Katz, a spokesman for TransUnion warns consumers not to key in on the specific number and instead look at all the information that is provided in the report.

So what should consumers seeking credit be doing? Ultimately, focusing on a single score, whether it will one day be free with your credit report or remain available for a price, is only one aspect of your credit worthiness. The credit report shows what you can do to improve and protect your overall financial health. So viewing both the score and the report is the best way to determine your level of risk as a borrower.

For a free copy of your credit report, visit http://www.annualcreditreport.com/ or call 877-322-8228. To top of page

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