Credit Scores Are Not All Created Equal: Lessons from TransUnion & Equifax’s Federal Fines

In January 2017, the Consumer Financial Protection Bureau (CFPB) announced credit bureaus TransUnion and Equifax would pay $5.5 million in fines and nearly $18 million in payments to consumers for deceptive marketing tactics used from 2011 on.

CFPB Director Richard Cordray wasn’t bashful when he described why the two credit bureaus were facing millions of dollars of punishment.

“TransUnion and Equifax deceived consumers about the usefulness of the credit scores they marketed, and lured consumers into expensive recurring payments with false promises,” Cordray said in the press release. “Credit scores are central to a consumer’s financial life and people deserve honest and accurate information about them.”

According to the CFPB’s consent orders (explanations of what the heck happened), around 700,000 TransUnion customers were affected. The consent orders didn’t specify the number of affected Equifax customers.

News of the action against TransUnion and Equifax popped up on NerdWallet and TIME’s Money site; it was a pretty big deal in the personal finance world. But the real question is, What does all this mean for you? What can we learn from this that will help us be better consumers?

To answer those questions, we need to look at a few different things. They’re going to sound intimidating, but they’re actually pretty simple: the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the difference between various credit-scoring models.

The Law Protects You from What TransUnion and Equifax Were Doing

Starting in 2011, TransUnion and Equifax offered credit scores to all of us for $1. To sweeten the pot even more, both agencies said that the score they provide you is the score lenders use when they make decisions about loans.

TransUnion and Equifax Lied About the Usefulness of Their Scores

Here’s the problem with that: the credit scores both agencies use aren’t typically used for credit decisions. Why? It has to do with the difference between their scores and your FICO score, which is the score most lenders use to decide your loan amount, repayment period and interest (we’ll get to that in the next section).

Remember the Dodd-Frank thing we mentioned? It’s a set of regulations passed after the Great Recession to keep financial institutions from taking advantage of you through deception and unfavorable terms.

According to Dodd-Frank, credit scoring agencies are not allowed to deceive you about the value of the credit scores they sell you. As a result, the CFPB nailed the two bureaus for deception. But that’s not all.

TransUnion and Equifax Used Deceptive Subscription Programs

Here at Highya, we do a lot of research into shady sales tactics. One of the classic rackets we see all the time is the subscription scam.

You’re told you get a free trial for a product, but way down in the nether regions of the fine print you’re told that you’ll be charged the full amount for a new shipment of the product two weeks after you order your free trial and each month after that.

Turns out the CFPB said that TransUnion and Equifax did the same thing. They pitched a $1 credit score subscription to their customers, but didn’t make it “conspicuous” and “clear” that customers would be automatically enrolled into their $16-a-month credit monitoring program between 7 and 30 days after they signed up for their free trial.

Equifax Pushed Ads on Consumers at the Wrong Time

In addition to these pair of illegal practices, the CFPB also noted that Equifax advertised their credit products on before consumers signed up for a free credit report, another violation of regulations.

So, what does this mean for you? In terms of getting tricked into subscriptions for scores that don’t matter, you’re in the clear. Credit-focused website Credit Karma gives you free TransUnion and Equifax scores and a free credit history. You don’t have to offer any payment information to get your scores.

But the issues here go beyond that, and the fact that the scores you get from these two bureaus don’t reflect the score lenders use should make you wonder why they don’t matter and which scores do.

The Difference Between Scores From TransUnion, Equifax and FICO

One of the things we’ve learned over the past year is that consumers tend to think they have a single credit score when they actually have multiple credit scores.

There are three major credit bureaus: TransUnion, Equifax and Experian. Each one uses a particular set of mathematical formulas to turn your credit history (how much debt you have, late payments, # of credit cards, etc.) into a score.

TransUnion and VantageScore

TransUnion takes your credit history information and passes it along to VantageScore, a company who generates a score based on your history and then gives it to TransUnion. So, when you log into your Credit Karma account to check your scores, what you see when you check out your TransUnion score is actually a number VantageScore generated.

According to TransUnion’s explanation, the VantageScore does a good job identifying consumers with prime credit scores (680-739). Also, they assign scores to 27-30 million consumers who didn’t previously have scores, and they do this by analyzing 24 months of credit history that includes utilities, rent and phone payments.

Now, the CFPB said in their statement about their decision against TransUnion that the company’s scores aren’t as important as they made them out to be. So, basically, when you applied for a car loan or a mortgage, there’s a good chance whoever was lending you money didn’t check your VantageScore.

Who does check your VantageScore? That’s a bit of a tough question, but the simple answer is that two big Wall Street firms, Fitch Ratings and Standard & Poor’s, use the score as part of an overall analysis of mortgage risk. As you can see, that’s a little different than what TransUnion was telling their customers, according to the CFPB.

Equifax and Their In-House Scoring Model

Unlike TransUnion, who works with VantageScore to create a score, Equifax uses a proprietary in-house model, which means they create a score with their own method and nobody else is allowed to use that method.

Exactly which factors they take into account is a bit of a mystery.

In our opinion and based on our research, we think Equifax, in a basic sense, puts emphasis on payment history, your overall balances in relation to credit limits (“utilization”), as well as other, more minor factors, like age of credit and number of recent credit inquiries.

Here’s Equifax’s explanation of their score: “Like other score models used by lenders and others in the market today, it is a calculation of the information in your credit file, and is used to predict credit risk. The Equifax Credit Score ranges from 280 to 850.”

FICO and Their Scoring Model

While the previous two scores, as the CFPB pointed out, aren’t as important as TransUnion and Equifax made them out to be, the FICO score is infinitely more important to your ability to get good rates on mortgages, car loans and more.

Whereas VantageScore and Equifax are a bit fuzzy on how they figure out your score, FICO is pretty straightforward about the major factors that impact your number:

  • Payment history: 35%
  • Credit utilization: 30%
  • Length of credit history: 15%
  • New credit: 10%
  • Credit mix: 10% (loans, credit cards, store cards, etc.)

What we found kind of weird about FICO and the other scoring models is that, for some reason, FICO is the score to which lenders go and not the others. Why?

Related: Do Location, Income or Age Influence Your Credit Score?

Here’s the Reason Your FICO Score is the Most Important One of Them All

To get the answer as to why the FICO reigns supreme, we talked with Steve Ely, CEO of eCredable and a former senior vice president at Equifax. Steve told us the main reason why FICO is the make-or-break score is trust. The federal regulators who sign off on the loans financial institutions give trust FICO over other models.

If a lender comes to them and says they handed out loans based on a new scoring model, they’ll have to provide all kinds of data and legit reasons as to why they wanted to use that new model.

“All the regulators know FICO and trust FICO,” Steve said. “They’re not opposed to other scores, they will just take more time to understand how those scores are being used and that’s time the lenders don’t always like to spend.”

While regulators are more comfortable with FICO, VantageScore is also recognized by regulators like the Federal Housing Administration, the Federal Reserve Board and the CFPB.

How to Get Your FICO Score for Free

There are dozens of ways to get your FICO score for free. Bank of America credit-card customers can access their FICO score from their online account, as can customers of Discover’s credit cards or their free Credit Scorecard program. Check with your bank or credit card to see if you have free access to your FICO score.

One More (Confusing) Thing About Your FICO Score

Remember how we said that consumers often make the mistake of thinking they have one score when they actually have multiple credit scores?

The same holds true for the FICO score. The company creates all different kinds of models to generate FICO scores. Why? Because the score is generated from information gathered from different sources, and takes into account the shifting habits of consumers over time.

For example, FICO uses a unique model for information gathered from each of the three major credit bureaus:

  • TransUnion: FICO Classic ‘04
  • Equifax: Beacon 5.0
  • Experian: FICO II

Don’t let the names confuse you; they’re all FICO score even though Equifax calls it “Beacon”. These aren’t the only three, either, Steve Ely told us: there are more than 25 FICO scores in production. If you’re applying for a loan and the lender uses your FICO score, ask them which type of score they use.

Wrapping It Up: How to Navigate the World of Credit Scores

The CFPB’s recent decision to slap TransUnion and Equifax with fines and requirements for restitution payments brought a couple of key consumer issues to the forefront.

From our perspective, the most important issue wasn’t so much the deceptive practices; sites like Credit Karma now let you access your TransUnion and Equifax score without handing over payment information.

The key issue here is that consumers understand which credit scores matter when they head to the bank, credit union, or sites like Quicken Loans to get a loan for their car or home.

If you’re under the impression that your financial institution uses your Equifax score when they decide what kind of auto loan they want to give you, you could be in for a surprise when they tell you they calculated the terms based on your FICO score.

While the variation in the scores isn’t much, it could be enough to push you from one rating tier to another and cost you percentage points on your APR.

Our advice? Stick with your FICO score if you’re buying a mortgage or car soon and will use a loan to finance it. Chances are, your lender will look at your FICO when they’re figuring out the amount they’ll lend you, repayment period and APR.

The scores you get from TransUnion, Equifax and Experian aren’t irrelevant, though. If you stay on top of your scores, you’ll know when changes take place and can identify why or how those changes happened.

For example, your FICO score may not change over the course of a week, but you may get a notice that your TransUnion score has changed. Having access to multiple credit scores gives you a clear, up-to-date picture of what’s going on with your credit history.

“My advice to consumers is to stop obsessing over your actual score,” Steve told us. “Just stay on top of your credit score. As long as you know where you’re headed, directionally speaking, you’ll be okay.”

Steve brings up a really good point when he says you should be aware of the direction you’re headed. Your scores let you know if your credit rating is consistently rising or falling. With this information, you can determine what’s affecting your credit. Knowing the cause will help you create habits that will build up your scores instead of tear them down.

If you want to learn more about credit scores and how to improve them, check out a series of articles we wrote on the subject:

These articles walk you through the basics of each topic, help you understand the industry lingo and give you solid, actionable tips that can help you get control of your credit scores.

J.R. Duren

J.R. Duren is a personal finance reporter who examines credit cards, credit scores, and various bank products. J.R. is a three-time winner at the Florida Press Club’s Excellence in Journalism contest. He is a member of the Society of Professional Journalists and his insight has been featured on Investopedia, GOBankingRates, H&R Block and Huffington Post.

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