Consumers today are being bombarded by offers to get their “credit score” for free. These lead generation websites don’t provide the FICO Scores used by nearly all lenders – but some “experts” say that doesn’t matter. In fact, some people claim that the VantageScores distributed to consumers through these websites are perfectly good approximations of the FICO Scores used by lenders.
The argument goes something like this: because multiple versions of the FICO Score exist and are used by thousands of lenders, no single FICO Score represents a consumer’s “credit score”. It doesn’t matter whether a consumer receives a FICO Score or VantageScore, because they all work similarly: if you rank high on one score, you’ll rank high on another score and all these scores move up and down together.
This is simply not true and new research confirms it.
FICO has nine widely used versions of the FICO Score in use at each of the three national consumer reporting agencies (CRAs). (One CRA has a 10th widely used version in use.) These include score versions that have been developed for specific products, such as auto loans (e.g. FICO Auto Score 8), and older generations of the FICO Score still in use by lenders (e.g. FICO Score 2). These older versions of the FICO Score are similar to older generations of an iPhone, Windows or any software product that is refined and improved over time.
Each version of the FICO Score may produce different scores for the same consumer because the algorithms are different. For example, FICO Score 9 treats medical collections differently than past versions. Someone whose only negative item is a paid medical collection can have a FICO Score 9 that is over 100 points higher than prior FICO Score versions.
In fact, FICO’s research shows that the average difference between consumers' high and low FICO Scores (from a single CRA) is 62 points. Ten percent of consumers have a score variance of 100 points or more. Not surprisingly, then, 45% of the population has an “economically meaningful” difference between their highest and lowest FICO Score – meaning they would likely get a different credit approval decision or rate from a lender. (With its different development methodology, similarly comparing VantageScore to each FICO Score version would reveal even greater variance.)
In my case an economically meaningful difference isn’t just theoretical: I have a 100 point variance between my lowest score, FICO Auto Score 8, and my highest score, FICO Bankcard Score 2. Obviously, whatever three-digit number VantageScore would derive from my credit file can’t simultaneously approximate the vastly different FICO® Scores used for my auto and credit card applications.
While the impact on consumers paying for non-FICO Scores is obvious, it’s also significant for consumers receiving these scores for free. Tens of millions of consumers come to believe that their “credit score” is much higher or lower than the FICO Scores actually used by their current or prospective lender. Many are likely to forgo seeking access to better housing or better transportation, because they mistakenly think they don’t qualify. Others, thinking they have a high score when they do not, will be rejected when they apply for credit and end up with an even lower score from the resulting inquiry.
Scoring the Unscorable
For tens of millions of consumers, an even more troubling disconnect exists between the VantageScores they receive and the FICO Scores used by lenders. These consumers receive a VantageScore when no FICO Score can be calculated from the data in their credit bureau file.
Why don’t they have a FICO Score?
Because FICO Scores are used by thousands of lenders and relied on by investors, regulators, insurers, rating agencies and other stakeholders, FICO needs to maintain the highest standards of score reliability. Therefore, FICO only generates FICO Scores on files that have data that is sufficient and recent enough to generate a reliable score. 28 million consumers have traditional credit bureau files with data such that no FICO Scores can be generated for use in underwriting mortgages, auto loans or other credit products.
In contrast, when credit scores are targeted for sale and distribution to consumers, providers are free to calculate “credit scores” on virtually every file, regardless of the validity and reliability of the resulting scores. When the objective is to monetize as many consumers as possible, for all those involved - whether VantageScore or lead generation sites, such as Credit Karma - any three-digit number seems acceptable.
However, these scores don’t reflect consumers’ current credit-worthiness and the 28 million consumers who have credit bureau files that are not scored by FICO shouldn’t be told they have a “credit score”. We’ve come to understand that somewhere between 15% and 20% of consumers seeking free scores online are not scored by traditional FICO Scores.
All of this is compounded by consumer confusion regarding the scores they are receiving. Research shows that 85% of consumers who get scores from sites that do NOT distribute FICO Scores think they are getting a score widely used by lenders. About 65% think they are actually getting a FICO Score when they are not. No wonder millions are surprised to learn that the FICO Scores their lenders are using are much different than the non-FICO Scores marketed as their “credit score” from the lead generation sites.
It’s important to know all of your FICO Scores, and to understand which scores lenders are using when you apply for credit. Consumers who purchase a FICO Score product at myFICO.com always get all widely used versions of the score. Even better, the FICO Score Open Access program has enabled lenders to share with their customers for free the specific FICO Score versions used by those lenders to manage over 180 million consumer credit accounts. All lenders in the program disclose the FICO Score version prominently with the score.
Imagine if lenders could share consumers’ credit scores with their prospective customers before they apply. And not a “credit score” highly unlikely to be used by lenders, but the specific FICO Score version the lender uses. The same credit score the lender shares with the consumer when required by law, such as through adverse action notices and risk-based pricing notices. The same credit score version used by lenders to originate the credit account and, then, shared with investors in securitizations. There is a way – stay tuned.