Free credit scores are everywhere!
Why is this? Is some entity making money from this suddenly pervasive online offering? Should consumers be clicking on these links each time they have the opportunity?
For answers to these and other questions about credit scores, I spoke with Liz Weston, a certified financial planner and a personal finance columnist for NerdWallet.com.
“It’s such a transformation from a couple decades ago, when your credit scores were actually secret. You weren’t even supposed to know what they were,” Weston said. “Now, they’re practically being hawked at every street corner.”
The reason for this, explained Weston, is the three major credit bureaus — Experian, TransUnion and Equifax — got together and started VantageScore, a consumer credit scoring company that was created as a competitor to FICO (also known as the Fair, Issac and Company), a consumer credit risk scoring service that has had a monopoly over the credit scoring business since the mid-1950s.
The credit bureaus decided they wanted a piece of the action.
Their model, VantageScore, is made available to banks, credit cards and other financial sites, allowing them to give away VantageScores for free. This helps the sponsoring sites attract visitors, while VantageScore is able to get in front of more potential business customers (e.g. the companies hosting the sites).
And it has worked, according to Weston.
Though FICO is still by far the dominant player, VantageScore now is being used in billions of lending decisions, she said.
“Once VantageScore started pushing this model, FICO essentially had to respond by expanding who it’s providing scores to,” Weston said.
So now, FICO also offers free credit scores.
Weston clarified: “It’s not truly free. The companies are actually paying, but the scores are being provided cheaply enough that these sites can offer them for free.”
Weston provided some additional and valuable insights into credit scores that everyone should know.
She emphasized that every consumer has more than one score. To begin with, both FICO and VantageScore have multiple versions.
The latest credit scoring formula by FICO is FICO 9, and it includes some big changes from FICO 8. Medical debt sent to collections is no longer rated as negatively as other, non-medical debt, and any collection debt that has been paid in full is now disregarded.
But consumers shouldn’t get too excited about these changes, Weston warned, because FICO 8 is still the most commonly used version. Mortgage lenders often use even older versions.
Weston additionally pointed out that a credit card lender has different needs from an auto lender, who has different needs from a mortgage lender. So, each tweaks their chosen formula in a different way to meet their own requirements, potentially resulting in different calculations for each.
She suggested that if consumers are interested in seeing the five or six FICO scores that are most commonly used in making credit decisions about them, they should go to www.myFICO.com. There is a charge of $60.
Regarding all the free credit scores, Weston wisely pointed out there is no free lunch.
“These companies want to market to you (based on the data in your credit report),” she said. “You are sharing personal information with the provider of the free scores because you are giving them access to your credit report. Be sure you are comfortable with that.”
Weston recommended consumers access the free scores offered by financial companies that they already do business with. If they want a report that updates weekly rather than once every one to three months — as banks and credit cards often do — they might additionally consider checking their scores at a site like NerdWallet.
One final piece of advice provided by Weston was this: “I’d strongly recommend consumers apply a credit freeze to all three of their credit reports.”
This used to involve a charge, but as of Sept. 21, Congress made implementing a freeze free.
“You can unfreeze your credit report in just a few minutes by going online,” Weston said. “And now that it’s free, there’s really no reason not to.”
But, she emphasized, it’s important to keep track of the PIN.
Parents with children, who are under the age of 17, might additionally consider freezing their children’s credit scores. This will first require that each credit bureau create a report, then freeze it at the parents’ request.
She warned, if a child already has a credit report, that could be a problem. This can indicate identity theft has occurred.
“Child identity theft doesn’t get discovered for years and the problem is massive by the time you discover it,” Weston said. “Locking down children’s credit reports can really help. But you’ll have to keep track of that PIN — maybe for years.”