Does this make you angry?
I’m considering lobbying the government to close a huge loophole (that I frankly think is a scam), but before I do that, I’m wondering if you will give me your feedback. If I get enough interest, I’ll push forward. First, though, let me give you some background information that leads up to the big scam …
In 2003, Congress passed something called the Fair and Accurate Credit Transactions Act (FACTA). Among other things, FACTA required the three major credit bureaus—Equifax, TransUnion, and Experian—to give consumers a free credit report annual.
FACTA was promoted as a big consumer-protection law. In response to FACTA, the three credit reports joined forces to create AnnualCreditReport.com, which is where any consumer can go to get a free credit report once a year.
Sounds great, right? But not so fast … Notice that you can get a free credit “report.” You can’t get your credit score for free.
This brings me to the first problem. Having a credit report without also getting a credit score is like having a doctor hand you a brain scan reading, and then walk out of the room before explaining the results.
Would it cost more to just print the credit score on top of the credit report? Of course not. But the bureaus want to make money off you, so they found a loophole in the law. Or maybe Congress intentionally wrote the loophole in the law to help out the banks and bureaus.
Regardless, FACTA made a big deal about protecting you, the consumer, but the end result is that credit bureaus have an easy way to profit off you. They charge you for your credit score.
This in and of itself makes me boil. But the problem goes even deeper …
You see, the credit score they sell you isn’t even the same credit score a lender would use to determine your creditworthiness.
They give you a generic, worthless credit score based on their own formula instead of the FICO formula that lenders use. In fact, the credit bureaus actually admit to this in fine print. For instance, when downloading your free annual credit report from Equifax, you will be offered your Equifax credit score, which you have to pay for. Check out the fine print I received when I last pulled my free credit report from AnnualCreditReport.com:
“The Equifax Risk Score [Equifax’s version of a credit score] and the credit file on which it was based may be different than the credit file and credit scoring model that may be used by lenders.
The truth is: It is different than the score used by lenders, and it infuriates me. Almost every lender out there uses FICO, so any other score is worthless—total garbage.
In fact, I tested this on my own score. One day, I bought my credit scores from each of the bureaus, and on the same day, I pulled my FICO score. The difference between my FICO score and the generic scores provided by the bureaus was huge: 237 points in one case.
237 points!
So not only did FACTA end up creating a loophole that allows the credit bureaus to sell junk to people like you and me, it also creates an artificial sense of security that allows the banks to profit down the line.
You see, the generic scores are almost always higher than a true FICO score. In my case, the difference was a whopping 237 points. So let’s imagine that there’s only a 70-point difference. You buy your generic score and think it is 722, so you think you have great credit. You don’t do anything to increase your credit score because why would you? Your score is great!
A few months or years later, you apply for a loan, and guess what? Your actual credit score—your FICO score—is 652, which his way too low to get the best interest rates.
So not only do you spend money on junk, but you also get false information that results in higher interest rates down the line.
Does this make you angry? I’m asking because I want to lobby our elected officials to close the loophole and require the bureaus to provide a true credit score once a year. Your three-digit credit score is your financial reputation. You should have a true indication of what this reputation is.
If you agree with me, leave a comment below and let me know what you think. What do you like about this message? What don’t you like? I know how confusing this can all be, so help us refine our message by pointing out anything that is confusing.
Philip Tirone
