Not All Credit Scores Created Equal

It's an issue Hedrick deals with all too often: Car buyers walk into his office with an inflated sense of their creditworthiness and he has to burst their bubble. Recently, a client came in armed with a copy of a credit report that said her score was 640. When Hedrick pulled the report, however, her score was 600. That 40-point reduction in her score meant the difference between qualifying as a prime borrower and paying 7.85% interest and being considered subprime and getting a loan at 11.64%.

"I have to explain to them that [what they have] is not a true score," Hedrick says. "They don't believe me because I work in the car business. But it happens all the time."

These days, hardly anyone questions the power of the almighty credit score. Lenders use it to determine who qualifies for a loan and what interest rate they get, insurers calculate premiums based on it, and even employers make hiring decisions with it in mind. As a result, consumers are flocking to the credit bureaus to buy their scores. Sales of scores, reports and credit-monitoring services to consumers by credit bureaus generated $488 million in revenues in 2006 and are expected to reach $864 million by 2010, according to market research firm TowerGroup.

Problem is, the scores that consumers buy from the credit bureaus or heavily-promoted sites like FreeCreditReport.com or TrueCredit.com — owned by Experian and TransUnion, respectively — are not the same scores that are sold to lenders, landlords, insurers or employers.

Take FICO, the credit score developed by Minneapolis-based Fair Isaac (FIC) that the majority of lenders use. Depending on the type of credit a consumer seeks — a mortgage, installment loan, auto loan or credit card, for example — lenders will use different "flavors" to determine a consumer's default risk. Auto-loan payments, for example, weigh more heavily in the formula that calculates a FICO score for auto lenders, while credit-card payments matter more to the FICO used by credit-card companies. (For more on auto and insurance scores, read our story "Scores Galore.")

Adding to the confusion are the different generations of FICO. Each time Fair Isaac rolls out a new version of its scores, some lenders implement them while others stick to the old ones. "It's literally a huge, huge set of scoring products that are available to lenders and consumers have very little clue that [all these scores are] being used," says John Ulzheimer, president of Credit.com Educational Services.

With the exception of the FICO score used by mortgage lenders, which consumers can purchase from Equifax or MyFico.com, Fair Isaac's consumer web site, none of these scores is available to consumers. Instead, they're offered what the credit bureaus call "educational scores," such as Experian's PLUS Score and TransUnion's TransRisk New Account Credit score.