Is This the Age of the Free Credit Score?

If you feel like there’s more chatter these days about free credit scores, you’re not mistaken. In November, Fair Isaac Corp. (FICO) announced its FICO Score Open Access program, which allows customers of participating financial institutions to regularly view their FICO credit scores for free. So far, the program is available to Barclaycard, First Bankcard and Discover It cardholders.

“The goal really is to help consumers understand their FICO score and that being the foundation to good financial health,” said Anthony Sprauve, director of public relations for FICO. “There are a lot of the quote-unquote free credit scores available and it’s hard for the consumer to know which credit score to pay attention to.”

He’s right — there are a lot of credit scores out there. Most of us have dozens of different types of credit scores used by different institutions for different financial products. There are more than 50 FICO scoring models alone. VantageScore Solutions, a competitor of FICOs that is owned by the three major credit reporting bureaus, has nine different lender credit scores. The bureaus themselves have their own custom lender scores, and their are various other third party credit scoring companies. In addition, various web sites offer free “educational” credit scores — scores that are based on the information in your credit report, just like lender scores, however they aren’t actually used by lenders. Credit.com, provides users free access to two lender scores — the latest VantageScore and Experian credit score — and also provides a breakdown of the specific factors that make up an individual’s credit score. The FICO program provides cardholders with the same score the lender uses to manage that person’s account.

Additionally, consumers with FICO Score Open Access receive the top two drivers of their score — whether they’re positive or negative behaviors — as a way to inform them of what habits to improve or maintain.

Building Consumer Awareness

Earlier this year, the Consumer Federation of America released a report based on a joint survey with VantageScore Solutions through CreditScoreQuiz.org. A news release about the report highlighted the educational importance of credit scores, saying consumers who have seen one or more of their credit scores in the last year understand how scores are created and used more than consumers who have not obtained their scores.

“Misperceptions about credit scores are extremely concerning,” said Barrett Burns, president and CEO of VantageScore Solutions, according to the news release. “People who fail to understand exactly what can impact their score have little incentive to manage the real things that truly do make a difference; such things as paying bills on time, keeping credit card balances low, and not taking out unnecessary loans.”

The new FICO program is a variation of one the company tried in 2009, but Sprauve said it didn’t gain much traction with lenders. He said the goal with FICO Score Open Access is to reach all 200 million Americans with FICO scores (the program is currently available to roughly 35 million through Barclaycard, Discover It and First Bankcard).

“In the last couple of years there’s been a groundswell of trying to help consumers be more informed, be more aware of all aspects of their financial health, and I think consumers are more interested now than ever before,” Sprauve said.

Companies do not have to pay to give their customers FICO scores for free — it involves changing their terms of use with FICO — and it’s up to the institution how to distribute the scores and how often to do so. For example, the score may appear on a monthly statement.

Credit Score Confusion?

With consumers having access to different credit scores from different sources, some confusion is likely. Often people ask, which is my real credit score? The truth is that because there are so many different scoring models, there is no one real score. It’s not like the SATs. There are two issues at play here: transparency and education.

Through the FICO Score Open Access program, participating lenders are providing transparency first and foremost. Cardholders know how lenders see them, at least to some extent, but consumers need to remember that the score one credit card company uses is likely different from the score another uses, or the score they get from a website.

Since all credit scores are based on the the information in one of the credit reports issued by the credit reporting bureaus, the best thing that people can do from an educational perspective is first to make sure that the information in your credit reports is correct (because a credit score is only as accurate as the credit report on which it is based). Each of us is entitled to our credit reports from each of the major credit reporting agencies for free once a year at AnnualCreditReport.com. Second, pick a score and track it over time — but look at both the score itself, as well as the five components that make up the score.

Those five components are:

Your Payment History — 35% of your score
How Much You Owe Compared to How Much Credit You Have Available to You — 30% of your score
The Age of Credit History — 15% of your score
The Number of New Credit Inquiries — 10% of your score
The Different Types of Credit You Have — 10% of your score

Again, there are a number of free tools available to you, including Credit.com’s Free Credit Report Card which in addition to providing free credit scores, breaks down these five components using letter grades and related articles.

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