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.

While all credit scores are calculated using the information in your credit report, the formulas used are slightly different, and in some cases, so are the scoring ranges, says Rod Griffin, director of public education at Experian. Fair Isaac, after all, trademarked its FICO score, which ranges between 300 and 850, so the bureaus cannot sell proprietary scores that are exactly the same. The PLUS score, for example, ranges between 330 and 830 and VantageScore ranges between 501 and 990.

The difference between the score a consumer buys online and the one their lender pulls — even if it's from the same bureau — can be significant. "It's possible that you pull your PLUS score at 720, but the score sold to the lender is 695," says Griffin. He says scores shouldn't matter to consumers as much as knowing where they stand in the eyes of lenders and being able to interpret the information in their credit reports. "Credit reports are driving all of these numbers," he notes. "Focusing on improving your credit report will make all your scores go up."

But with lending standards tightening across the board, credit scores are becoming hard to ignore. "Every five points are pretty darn important," says Ulzheimer. That's especially true for consumers planning to apply for a loan or credit soon, and whose scores are below the subprime cutoff — a limit that keeps creeping higher these days. (For auto lenders, that's generally 640. To get approved for a mortgage, however, you may need as much as 700.)

"The score is really your ticket to your financial future," says Travis Plunkett, legislative director at advocacy group the Consumer Federation of America. "If you want to get a general sense of your creditworthiness, it's fine to check a credit bureau score or even just to pull your free credit report to tell if you're in good shape." But if you're applying for a major line of credit, such as a mortgage or auto loan, Plunkett recommends buying your FICO score from a service that sells it (see chart for details) or if you've already applied for a loan, ask your mortgage lender to give you your score, for free.

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This story was corrected on May 2, 2008.

In the original story, we incorrectly stated that the Chrysler dealership that Marvin Hedrick works at is located in Springfield, Fla. The dealership is in Spring Hill, Fla.