Are Free Credit Scores Useless?

Last week, credit bureaus were ordered to cough up $23 million for deceiving customers. The CFPB accused the credit bureaus of making false promises regarding the usefulness of the credit scores being sold to the public. According to the regulator, “TransUnion and Equifax falsely represented that the credit scores they marketed and provided to consumers were the same scores lenders typically use to make credit decisions. In fact, the scores sold by TransUnion and Equifax were not typically used by lenders to make those decisions.”

And what score was being sold by the bureaus? In many cases, it was the VantageScore. The CFPB explicitly states that ”VantageScores are not typically used for credit decisions.” If you get your free credit score from websites like CreditKarma, you are also getting the VantageScore 3.0. Does that mean your free score is useless?

The short answer: no, your free credit score is not useless. You just need to know what to do with it. Before you panic, or ignore your free credit score, here are four things you need to know.

1. With the exception of agency-backed (Fannie Mae and Freddie Mac) mortgages, you will never know what credit score is actually being used.

There are two types of credit scores in the market: generic credit scores and custom credit scores. FICO and VantageScore are examples of generic scores. Why are they called “generic?” Because any lender can buy (and make use) of the score. And the score is built using credit bureau data of the entire population.

However, most lenders build their own custom credit scores. With a custom score, a lender will build a model using its own proprietary data. Imagine you are a risk manager of a bank. You could use the FICO score (which was built using the entire population), or you could build your own model that looks specifically at people who borrowed from your bank in the past. Clearly a custom score could be a lot more useful. Banks typically use custom scores, and the general public can never get access to these custom scores.

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