About one in five consumers are likely to receive credit scores that differ substantially from those used by lenders, according to a government study released Tuesday.
The study, by the Consumer Financial Protection Bureau, analyzed scores from 200,000 credit files from each of the three nationwide consumer reporting agencies: TransUnion, Equifax Inc. and Experian.
The discrepancies result from a variety of scoring models used by the agencies, which place consumers in different credit-quality categories 19 percent to 24 percent of the time, according to the study. About 1 percent to 3 percent of the time, the placement is off by two or more categories, the study found.
“This study highlights the complexities consumers face in the credit scoring market,” the consumer bureau’s director, Richard Cordray, said in a statement. “When consumers buy a credit score, they should be aware that a lender may be using a very different score in making a credit decision.”
Stuart K. Pratt, president and chief executive officer of the Consumer Data Industry Association, said his organization’s members fully cooperated with the study and provided all the data to government regulators free of charge.
Pratt pointed out that scores generated by different models provided similar results for the majority of consumers in the study. That proves that most consumers can trust the credit scores they receive, he said.
“This is good news from a consumer perspective,” Pratt said. “As a consumer, I always have the power to go out and shop for credit and make sure that I have the very best interest rate or terms on a loan.”
But consumer advocates said the study casts serious doubt on the accuracy of credit scores.
“What this is telling me is that the consumer doesn’t have a number to rely on,” said Pamela Banks, senior policy counsel for Consumer’s Union, the advocacy arm of Consumer Reports. “How can a consumer manage their financial affairs if they can’t rely on the score that makes a difference in the type of loan they get? They might get loans with a higher interest rate or might not even qualify for something when in fact they do.”
Consumers can request annual credit reports for free from annualcreditreport.com, but they usually must pay to obtain their credit scores.
Creditors also purchase credit scores to evaluate potential borrowers, but there’s no way for the borrowers to know whether they’re seeing the same scores that their creditors see.
The scores are vitally important and determine eligibility and interest rates for credit cards, mortgages and car loans. Landlords and employers also use credit reports to screen renters and job candidates.
The study results highlight the need for legislation that would give consumers the right to at least one free credit score a year, and the right to obtain any score that’s about them, said Chi Chi Wu, staff attorney for the National Consumer Law Center in Boston.
“This shows one of the most important roles of the Consumer Financial Protection Bureau, which is to produce this sort of rigorous, impartial research,” Wu said. “They have both the capacity and also the ability to get this data, that they can do this sort of analysis that can inform policy decisions.”
Credit reporting companies are about to come under much closer scrutiny from the bureau, a new federal watchdog created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. On Sept. 30, the bureau will start supervising 30 of the nation’s largest credit reporting companies for the first time. The three biggest ones – TransUnion, Equifax and Experian – keep files on more than 200 million Americans and produce 3 billion credit reports a year.
The unprecedented oversight will include site visits and data collection by bureau examiners who will review the companies’ business practices and privacy protections.