Understanding the Confusing Landscape of Credit Reports
In light of the recent sanctions against the most popular credit reporting agencies–Equifax and TransUnion, it seems like a good time to talk about credit reports.
By law, consumers are entitled to one free credit report each year. But, the reports can be confusing and overwhelming. And, at the end of the day, what you have is a long history of all your credit activities but NO credit score! For the credit score, you need to pay a fee.
Sanctions for Misleading Credit Reports
Regularly checking our credit reports to look for errors, particularly before applying for financing, is imperative. The thing is though, that the free report we receive from one of the reporting agencies, such as Equifax or TransUnion does not give us the actual FICO credit score that the lender uses when making a decision on your application. If you want to see what they are seeing, you must purchase it from a credit agency. However, even these paid reports are not an accurate reflection of what is going to the lender and this is why the Consumer Financial Protection Bureau (CFPB) stepped in and sanctioned TransUnion and Equifax. According to CFPB, the two giant credit reporting agencies “deceived consumers about the usefulness of the credit scores they marketed.” TransUnion uses the results of a special credit assessment algorithm developed by VantageScore Solutions and Equifax uses a different formula altogether. The problem is that neither formula is the one used by banks and other lenders to determine your credit worthiness. And this is where the two agencies fell down—both informed consumers that their scores were the same as those used by lenders. What a surprise it can be when the lender turns you down. What happened? The lender was using a completely different algorithm and by their calculation your score was 100 points lower.
Who Looks at Your Credit Report?
The most typical users of consumers’ credit reports are of course banks, lenders, credit card companies, mortgage companies, auto loan financers, and the like. But landlords, potential employers, insurance companies and sometimes even utility companies will also check to see if you are a good credit risk. Your credit score and credit history form the basis of whether you will get that mortgage, or a line of credit at the bank or more favorable interest rates. Therefore it makes absolute sense that you also have some idea of what is in your credit report. However, as pointed out by CFPB, you should not rely upon the credit score you receive from the reporting agencies as you prepare to apply for financing.
Now that you know the limitations of the free and paid credit reports, what are some reliable sources?
WalletHub, NerdWallet and Credit Karma provide free credit reports and scores. If you use NerdWallet or WalletHub, you can only access your credit report from TransUnion and see your Vantage score. Credit Karma allows you to access both Equifax and TransUnion. These sites offer a couple of other worthwhile services. For instance, they will provide you with a list of credit card issuers that are most likely to approve your application. This is great if your credit score is not the best as it will save you from rejections which will reflect negatively on your credit score.
Be Vigilant About Checking for Errors
In conclusion, all financing aspects of your life depend upon your credit history. Mortgages, car loans, credit cards and any other kind of debt is going to be influenced by your credit score in terms of acceptance or rejection. Your credit score will set the terms of your financing and limit to what degree you can negotiate on the terms. Therefore, monitoring your credit report is key to avoiding surprises when you make an application. According to CFPB as much as 23% of the total complaints made to their website in 2016 were in regards to consumers’ credit reports. Top of the list of credit report complaints was that the reports contained errors. If you find an error, fix it immediately.