The Consumer Financial Protection Bureau under President Barack Obama has just gone into effect. Designed as an industry watchdog organization, it’s a dog with bite, because it can actually enforce consumer protection laws and go after violators on Wall Street or elsewhere.
The CFPB has a few items on its agenda – simplifying mortgages, examining credit card agreements for disingenuous hidden fees – but you should know about one item in particular: credit scores. Everybody pretty much knows how to have a good score – pay your bills on time and make a lot of money – but the exact methodology the three credit reporting agencies use to arrive at that magical number is a mystery to most. And the CFPB has proven just how mysterious.
It turns out that credit agencies give consumers different scores than they give banks and other institutions. They use different mathematical models depending on whether an individual is asking for his or her own score, or whether a lender is asking for a score in order to make a decision about the individual. The CFPB study didn’t indicate whether or not individuals are on average getting better or worse scores than institutions.
We all have those stupid “freecreditreport.com” jingles in our head (guess what… it’s not so free), and in fact the credit score agencies have created quite a racket for consumer scores—a quarter of these companies’ incomes are derived from providing individuals with their own scores. So this study is sort of troubling, isn’t it? What the heck are we paying for?
The good news is that with the CFPB’s new supervisory role comes a little more consumer power. If an institution rejects you for a loan or anything creditworthiness-related, you can ask them for a truly free credit score. They are legally required to submit to you the credit report they used to turn you down. So, if you do get turned down, at least you can discover what your actual score is, instead of getting an inaccurate score from a huckster site whose “free trial” quickly turns into $14.95 a month.
The lesson here is that your “credit score”—the complicated “snapshot” number born from some near-unknowable mathematical alchemy—is just one part of your total picture of financial health. It’s not the end-all and be-all. And if “they” say your score is bad, there are steps you can take to raise it in a relatively short amount of time. Hopefully as the CFPB continues to define its role, consumers can get better (and actually free?) indications of their true credit score. You know, the ones that institutions actually look at, not the erroneous ones the agencies feed you on one of their numerous sites.
Tags: credit, credit score, freecreditreport.com, onsumer Financial Protection Bureau, personal finance
Don’t you just hate how your whole life and future is judged by a three digit number?!