We hear it all the time: Knowing your credit score and credit history is critical to maintaining your financial fitness.
Want to refinance? Getting a peek at your credit score is considered prudent before sitting down with a banker. Looking at renting a new apartment? Many landlords consider credit reports the tell-tale sign of whether you will be a good tenant. We’re told having an up-to-date view of not only credit history, but also how it’s tabulated numerically is a strength when dickering for that must-have home, car or lifestyle purchase.
Until recently, most of us figured the easiest way to get a snapshot of what bankers, lenders and other creditors see would be by ordering a copy of our credit score through a credit reporting agency.
While credit reporting agencies are required by law to supply consumers with a free credit report once a year, that summary doesn’t include your credit score – the actual number that suggests to lenders just how financially fit you really are. In most cases, that inside intel must be purchased from a credit agency. And not surprisingly, it often isn’t cheap.
But according to the Consumer Financial Protection Bureau (CFPB), the guys that oversee and enforce regulations regarding credit reporting, getting an accurate picture of what lenders see is actually harder than it would seem.
Last week, the CFPB levied fines against two of the country’s three largest credit reporting agencies for, among other things, “deceiving consumers in marketing credit scores and credit products.” Put in layman’s terms, the CFPB asserts that TransUnion and Equifax sold products they knew might not provide the information consumers thought they were getting.
“TransUnion and Equifax deceived consumers about the usefulness of the credit scores they marketed, and lured consumers into expensive recurring payments with false promises,” CFPB Director Richard Cordray said in a statement released last week by the bureau.
Both companies base their credit assessments on specially-patented scoring models. The scores that TransUnion sells to consumers, for example, reflect credit assessments compiled by VantageScore Solutions LLC. And they are wholly different from the formula developed by its competitor, Equifax Credit Score.
What is interesting is that neither of these proprietary credit score systems is used by lenders to make credit decisions. The VantageScore Solutions model, the CFPB asserts, may have been marketed to lenders, but it isn’t necessarily the “gold standard” by banks and other lenders for determining that ever-critical lending decision.
Similarly, Equifax’s model, says CFPB, is an “educational model” and often has no bearing on decisions made by financial lenders.
Both companies, asserts the agency, misled consumers on the value of their product — namely the ability of their patented credit-scoring system to match the assessment that lenders applied to potential customers.
“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.” the CFPB concluded.
The bureau also took the companies to task for advertising schemes that misled consumers on the cost of their services. The companies “falsely claimed that their credit scores and credit-related products were free or, in the case of TransUnion, cost only “$1. In reality, consumers who signed up received a free trial of seven or 30 days, after which they were automatically enrolled in a subscription program.”
Some consumers also complained that it was hard to cancel subscription programs and said they kept receiving demands for payment after they canceled the service.
CFPB also accused Equifax of illegally advertising its services to consumers when they logged on to AnnualCreditReport.com, the federally-mandated site that is designed to ensure that consumers can see a free copy of their credit reports once a year. Equifax operates the free site.
“Until January 2014, consumers getting their report through Equifax first had to view Equifax advertisements. This violates the Fair Credit Reporting Act, which prohibits such advertising until after consumers receive their report,” the CFPB determined.
To address the infractions, the bureau imposed a number of fines and requirements that are directed at reimbursing affected consumers and setting stricter controls over how reporting agencies can operate:
- TransUnion received the bulk of the fines and restitution costs. The company is expected to pay “more than $13.9 million in restitution to harmed customers.” It was also ordered to pay $3 million in fines to the bureau.
- Equifax’s share of restitution costs was lower at just under $3.8 million. The bureau did not indicate why Equifax’s share was lower, but it is also expected to pay $2.5 million in fines.
- Both companies must change the way they sell credit scores and “truthfully represent the usefulness of the credit scores it sells,” the bureau said.
- The companies must obtain the expressed consent of potential enrollees and must make it easy for consumers to cancel a product or service. The companies are also required to make sure consumers aren’t pursued for additional payments after they cancel a service.
Last week’s announcement comes on the heels of more than four years of investigations by the CFPB. In September 2012, the bureau published an analysis of consumer- and lender-purchased credit scores. It found that in as much as a quarter of the instances they looked at, the score that consumers received placed the applicant in a different scoring category than the one the lender’s score had designated. Consumers were therefore unable to use the scores to predict what lenders would actually see when reviewing the credit application.
The upshot, said the CFPB, is that “consumers should avoid relying on scores they purchase as the sole basis for assessing their creditworthiness when making important decisions about obtaining credit.”
Although the study acknowledged that there were as many as five different types of scoring systems that lenders could use to evaluate consumer credit-worthiness, there was no suggestion that lenders should be required to disclose the scoring system they use.
Instead, said the CFPB, consumers should check their credit reports and be vigilant in disputing errors. “Credit scores are calculated based on information in a consumer’s credit file,” the bureau concluded.
Image credit: Flickr/Miran Rijavec