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Why Your Credit Score Just Got More Confusing
Many financial consumers have learned about the secret about purchasing their credit scores. It is actually a dirty secret because the credit bureaus that sell these scores do not have to clearly disclose to you the facts about the scores you are buying. Let us tell you why your credit score just got more confusing: The scores you buy are not the scores used by lenders.
Government Studies Purchased Credit Scores The scores you buy are referred to as "educational scores". One of the new financial regulations passed by the Obama Administration required the Consumer Financial Protection Bureau (CFPB) to study the impact of different credit scoring models. The study titled "The Impact of Differences Between Consumer and Creditor; Purchased Credit Scores" was published and reported to Congress this past July.
The CFPB report validates that some of the credit scores consumers can purchase are used widely by creditors; others are not. In any case, if a consumer buys their credit score, "it is quite likely that any particular lender that consumer approaches for a loan will use a different credit score, given the diversity of credit scores in use in the market."
The Impact Of Purchased Educational Credit Scores Richard Smith, loan originator at Stearns Lending, (richardsmithhomeloans.com) also takes issue with this huge billion dollar marketing machine that the credit bureaus have created that zaps you and your wallet of about $10 each time you want a credit score. Smith writes that the CFPB report, although accurate, addresses the wrong questions.
The CFPB report calls the scores consumers purchase "educational credit scores" and points out that lenders do not use these scores. Providing these educational scores is now a multimillion dollar business. Their impacts, as outlined in the CFPB report, are: they increase market confusion; with a higher educational score, consumers might have a false sense of their creditworthiness and apply for a loan that may be denied; with a lower educational score, consumers might apply for loan terms that are worse than they could qualify for.
How Purchased Credit Scores Can Cause Confusion Lenders will rarely budge on credit score rules even if you are one point below their minimum. If you purchase your Experian PLUS score and it is 725 and you confidently walk into a bank and apply for a loan thinking you have excellent credit and then the lender pulls your score from the same bureau and gets a 718 (only 7 points off which seems innocent enough, right?)
Guess what? In this scenario, your credit rating drops from 'excellent' to 'good' in the eyes of the lender (720 is a common cut off many lenders use) and now your loan interest rate goes up.
Proposal To Protect Consumers With A Clear Disclaimer Smith proposes that a disclaimer for educational scores would be nice, such as, "This score is provided for educational purposes only. This score is likely not the score lenders will use." However, there are higher impact items that the CFPB could address which would truly protect consumers. After all, isn't "Protection" their middle name and the reason the agency was created?
Great Ideas To Help Consumers Improve Their Credit Score To truly benefit consumers and help consumers improve their credit scores, Smith has proposed a slate of recommendations for the credit bureaus: 1) paying a collection should improve the score, not 're age' a bad reference; 2) collections should only be reported once, and those posting duplicates should be fined; 3) collections and charged off account references should not be 're aged', but only reflect the date incurred; 4) payment plans on collections and charged off accounts should be reported as new installment references; 5) creditors should report corrections immediately and face fines for failing to act in a timely fashion; 6) creditors should respond to disputes within 48 hours.
Whether or not any of these suggestions become implemented remains to be seen. If enough complaints are heard by the CFPB and the credit bureaus on one or more of these items then they may choose to investigate further. In Washington, the squeaky wheel gets the grease. In the meantime, now you know why your credit score just got more confusing.
Author Resource:-
Nathan Randall, editor, DailyDollar Newsletter provides free daily advice on money matters plus coupons and discount codes. FYI...you can now access the DailyDollar Newsletter via iTunes podcast, YouTube video, and on Facebook and Twitter too.
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