FICO or FAKO?

We’ve all seen them – the never-ending television ads and radio commercials with the catchy jingle for free credit reports and scores.

Nowadays a number of similar companies are offering free credit reports and scores. With all of these ads for freebies, it’s no wonder that so many consumers believe that all credit scores are created equally.

First, a little history on credit scores:

A company called the Fair Isaac Corporation created the first credit score. It was made available to lenders in the very late 80s and soon thereafter began to pick up momentum and popularity in the lending world. The FICO score became the gold standard in the mortgage lending world when Fannie Mae and Freddie Mac endorsed its use for evaluating mortgage loan applications in the mid 90s.

For years the FICO score was a mystery to consumers and was only known by the lending industry. Credit scores have only recently been made available to the public in the last few years. In 2001, California passed a law that required credit scores to be made available to California residents.

This pretty much opened the floodgates for the rest of us.

It also turned into a cash cow for the bureaus. However, for two of the three, instead of selling the actual FICO score, where they had to pay royalties to the Fair Isaac Corporation – they created their own scores to sell to consumers.

That’s where the confusion started.

Now that the bureaus all sell scores targeted at the consumer market, many unknowing consumers assume that these scores are the same scores a lender would see. Unfortunately, this is just not the case and it often causes a lot of confusion for those that are looking to refinance a mortgage or trying to qualify for a new car loan.

Take Steven and Veronica Blanco for example. To get a better understanding of where they stood credit wise, they went online and paid for all six of his and his wife’s credit scores – one for each of them from each of the three major credit bureaus.

Between the two of them, their scores ranged from a high of 732 to a low of 705. Knowing that mortgage lenders typically go with the middle scores, Steven assumed that they would be fine in qualifying for a new home loan at a decent rate.

But when the couple applied for a mortgage loan through their credit union, they were shocked to find out that the credit scores their lender pulled were significantly lower, ranging from 645 to 672. After talking with their lender at length they learned that even though they had purchased their scores from one of the three major credit bureaus, the scores they purchased were not the same scores that lenders use.

So what score is the right score and where can I find it online?

Here’s the deal…the industry standard for credit scores is still the FICO score. The FICO score is the score that most lenders use when determining your eligibility and terms for a loan. While the FICO score is not the only credit score that lenders use, it is the most widely used with more than 90% of lenders using it to make their lending decisions.

The easiest and most convenient site to order your FICO credit scores is through Fair Isaac’s consumer website: www.myFICO.com.

This is the only site where consumers can order all three of their FICO credit scores from all three credit bureaus. You can also order scores from the credit bureau websites directly but you should be aware that you’re not necessarily going to get a score that lenders use.

While these scores are pretty much worthless in the lending environment, they are a constant source of revenue for the bureaus at the consumer level. Let’s take a look at what each of the three major credit bureaus offer to consumers:

Equifax
Equifax is the only bureau website that you can order your FICO score from directly – without having to search for an obscure alternate web address. The score is marketed as Score Power.

When you visit their website you’ll notice that they explain that the score that you’re purchasing is in fact a FICO score. The problem is that you’re only able to get the Equifax FICO score from this site and we all have three FICO scores – one from each of the three major credit reporting agencies.

Experian
Experian markets and sells the PLUS Score on their website. They also have a half dozen other websites marketed under different brands that also sell their Plus Score. Be very careful when watching commercials about free credit reports; that’s one of their marketing tactics.

If you’ve purchased a score from Experian or one of their consumer sites, you didn’t get your FICO score.

TransUnion
TransUnion sells the TransRisk score under their ‘TrueCredit’ brand. Their TransRisk score is also available for sale to lenders but it just isn’t commonly used.

TransUnion does sell the legitimate FICO credit score to consumers, but it’s only marketed at their TransUnion Consumer Services website at www.transunioncs.com.

As you can see, this site is almost impossible to find unless you know the exact website address. Just try Googling the consumer services division and you’ll see what I mean.

While these are only the websites of the major players, there are tons of other sites out there that offer credit reports and scores. The easiest way to be sure that you’re ordering a FICO score is to read the fine print. If it’s a FICO score, it’ll say so.

Buyer beware!

You’ve just applied for a mortgage or auto loan and your lender comes back with a three-digit number that summarizes your credit worthiness and you have no clue what that number really means. What is the difference between a 540, a 670 and a 780? If you’re not familiar with credit scores then these seemingly random numbers can make it difficult to determine where you stand. And in today’s difficult economic environment, you need every point you can get. In this article we’re going to find out exactly what these numbers mean to lenders – and to you.

*Range above based on the FICO credit score, which is used by most lenders.

Outstanding: 800+
If your credit score is over 800 then you’re pretty much the best of the best as far as the lending and insurance worlds are concerned. With scores this high, you represent an outstanding credit risk, almost non-existent, and you’ll qualify for the best deals. Consumers that score in the 800+ range typically have a long credit history with multiple credit accounts that have been paid on time for years. There are no derogatory records such as collections, bankruptcies or charge-off accounts and very little credit card debt. These people are almost immune to the credit crisis.

Very Good: 750 – 799
If your credit score is between the 750 – 799 range, lenders will view you as a very low credit risk and you’ll qualify for some of the lowest lending rates available. You manage your credit responsibly by paying your bills on time and keeping your credit balances very low in relation to the credit limits.

Good: 700 – 749
Credit scores in the 700 – 749 range are categorized as a low credit risk. There may be a history of late payments in the past but all of your accounts are currently paid on time and have been for the last several years. You also manage your credit card debt reasonably well and are not close to maxing out on your credit cards. Scores in this range won’t always qualify for the best deals but they will definitely qualify you for very competitive rates and terms.

Not Bad: 650 – 699
Now we’re starting to get into the riskier credit score ranges. If your credit score is in the 650 – 699 range, lenders and insurers will view you as a moderate credit risk. You probably have older derogatory items on your credit report that aren’t hurting your score as much as they used to. A score in this range could also be the result of high credit card balances or too many applications for new credit in the last few months. With scores in this range you should still be able to obtain credit and insurance, but your rates will be considerably higher and the terms would be much less attractive than they would be if you were in the 700+ categories.

Poor: 600 – 649
If your credit score is in the 600 – 649 range, then lenders and insurance companies will view you as a high credit risk. Scores in this range are typically considered “subprime” by most lenders. Your credit score could be lower than average because of derogatory items on your credit report, such as late payments, collections or even bankruptcy and/or you may have high amounts of credit card debt. Scores in this range are less likely to get approved for standard credit products and usually pay very high interest rates and even less appealing terms. It’s also important to note that scores in this range have a high possibility of being denied for credit or insurance.

Very Bad: Below 600
Consumers with scores below 600 are considered very poor credit risks and will have a very hard time finding a lender willing to take the risk to approve your applications. If you are approved, you’ll be charged extremely high interest rates and/or insurance premiums. Credit scores below 600 are usually caused by chronic late payments, collection accounts, or public records appearing on your credit reports. Combining excessive applications for new credit with large amounts of credit card debt can also lower your scores to this level. It will be difficult for you to obtain new credit without the help of a co-signer, a large down payment or collateral.

No Credit Score
There is one other category that we haven’t talked about and that is the ‘no credit’ category. In order for lenders and insurers to accurately predict your risk they need to evaluate your credit score. If you don’t have a credit score, they can’t predict your risk and will typically bet on the safe side and decline your application or price it very poorly. There are a few reasons why you may not have a score:

1. You don’t have any credit accounts in your credit files. In this case, having no credit score is better than having very bad credit for the simple fact that there are some lenders that will take the risk and give you a shot at establishing credit with them for the first time. These lenders are typically retail store accounts with smaller credit limits and higher interest rates. Another option could be a secured credit card. With either option, you can establish your credit by opening an account and managing it responsibly. This means making your payments on time and keeping the balances as low as possible. After 3 – 6 months of use, your credit report will be able to be scored.

2. You have credit accounts in your credit reports but you have not been using the credit cards or loan accounts regularly enough for there to be recent information or activity in your credit reports. In order for there to be a credit score, at least one of your accounts need to have been updated within the last 3 – 6 months to show activity. If you haven’t used any of the accounts in the last year or so, it might be a good idea to charge something small and pay it off just to show some type of activity on the account in your credit reports.

3. You have a deceased indicator on your credit reports. If you have a joint account with someone who passed away, it is possible that the lender will report the account as belonging to a deceased person. And if you’re a joint holder on the account, that notation can show up in your credit files too. If it does, you won’t be able to be scored until the deceased indicator is removed from your credit reports.