Personal Finance > Banking

Money Talk: Credit check
How credit scoring really works -- and why it matters
February 19, 2003: 2:23 PM EST
By Jean Chatzky, Money Magazine

NEW YORK (Money Magazine) - If you gave yourself kudos for checking your credit report recently, you may have to take it back, unless you checked all three rating agencies.

A little background: The three major U.S. credit bureaus -- Equifax, Experian, and TransUnion -- pull together data from public records and creditors, and use it to create credit reports for some 200 million Americans.

All three bureaus have independently contracted with a fourth company called Fair Isaac, which turns that data into a credit score. (Scores range from 350 to 800 points; scores of 620 and above are considered good.)

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The bureaus then sell the report/score combo back to creditors, insurers, landlords and employers, who use the information to decide whether to do business with you and on what terms. Because some creditors opt to report to only one or two bureaus, you have three different credit reports. From those three different reports, you have three different credit scores.

Just how different, we didn't know -- until now.

The Consumer Federation of America and the National Credit Reporting Agency have compared the three scores of half a million Americans. They found an average range of 41 points per person. The difference between the highest and lowest score was more than 50 points in 29 percent of cases and more than 100 points in 4 percent.

Mortgage lenders generally buy all three scores. Fair Isaac's Craig Watts, however, notes that they don't take an average. Some use the middle score, but those trying to boost business take the low one while those trying to limit their risk take the high.

That translates into dramatically different interest rates. On a 30-year fixed-rate mortgage, individuals with scores between 700 and 719 were paying an average 5.94 percent in early January. Those with scores between 620 and 674 were paying 7.63 percent.

Different scores, different rates

Other lenders and insurers typically access only one score. Again, which score they use could cost you. "In some cases, a 50-point difference would have no effect on your auto insurance premium," said Bernie Birnbaum of the Center for Economic Justice, who has studied credit scores. "In other cases, it could double it."

The smart response is to buy all three of your credit scores and compare them three months before you apply for a loan. Unfortunately, that can't be done. You can buy your scores from Equifax ($12.95) and TransUnion ($9). By the time you read this, you'll also be able to buy both from Fair Isaac ($12.95 each), though Experian doesn't sell its scores to consumers.

Your best move is to check the underlying credit reports (you can buy all three plus the Equifax score from Equifax or Fair Isaac for $39.95). If there's an error, send a letter or e-mail to get it corrected.

Personally, I don't think you should have to pay $40 to ensure the accuracy of information that's yours to begin with. E-loan CEO Chris Larsen agrees. He's agitating for more transparency, by which he means that every loan quote should indicate the credit score it's based on, "so consumers can really compare apples to apples."

He and other lobbyists succeeded in making this happen in California. It's time the rest of the country caught up.

Money Magazine Editor-at-Large Jean Chatzky appears regularly on NBC's Today. You can contact her by e-mail at  Top of page

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