I’m sure you’re quite familiar with those uber-annoying commercials with that band peddling “free” credit scores. By now, most of us have caught onto the trick behind these offers; they’re only free if you cancel your membership during the trial period. If you don’t cancel, your credit card will be charged a big fat fee – typically $15 to $30 per month. Worse yet, some of these services will charge you for 3 months at once when you forget to cancel… ouch!
Most people already know the aforementioned info, but there’s something else ugly behind these credit score offers that I’m willing to bet you don’t know about.
Now for the 2nd biggest problem
Paying for a score isn’t necessarily the biggest problem. After all, if you really need to know your creditworthiness (such as before a mortgage or major loan application) then forking over a few bucks to find out your number might not be a bad idea, right?
But before you do that, ask the question…what type of credit score are you getting in return?
Yep, that’s right. There’s more than one type of credit score. And no, I’m not talking about the fact that you may have 3 different numbers from each of the 3 credit bureaus (you probably already knew that). Rather, what I’m referring to is the formula being used to determine the number. According to Experian, it’s estimated that there are over 1,000 scoring formulas being used today!
One type is important, the others are questionable
The most widely used scoring formula you’ve certainly heard of is FICO. This is without a doubt the industry leader. When you apply for a mortgage, your FICO will be used. The same holds true for most major loans. FICO doesn’t publicly disclose the formula, but here are the general components that go into the calculation. The range runs from 300 to 850.
Now for the bad news… almost none of those credit score trial offers are giving you a FICO. In fact, there are only two sites which are licensed to sell real FICO scores directly to consumers: MyFICO.com (which they own) and Equifax.com. Anywhere else you go will be giving you something different, based on a totally different formula.
The other guys may or may not be useful
Almost all of the other scoring models out there are designed to mimic FICO. Some do a good job at that, others not so much. You could have a great credit score using one type and an awful score using another. It’s hard to do an apples to apples comparison with them.
For example, I have an American Express card and they recently solicited me to sign-up for a 30-day trial of their credit score monitoring service. I sprung for it just out of curiosity (hey, it’s my job to research these things). They use the Experian PLUS Score model – it’s marketed as being “for educational purposes only” and is not used by lenders. With that formula, I got a 761. That is a stark contrast from my actual FICO score, which is 790. Conclusion? For me, the American Express scoring service isn’t very accurate for comparative purposes.
On the other hand, there are some models out there which do a better job at replicating FICO. One example is CreditKarma, which I like because it’s free (Yes it really is free. Instead, they make money if you choose to apply for credit cards through them). CreditKarma uses a model built on TransUnion’s TransRisk score. From reviews I’ve heard, it seems to do a good job at more closely resembling someone’s actual FICO.
What should you do?
Now that you know this information, the next logical question is what should you do? Are these non-FICO scores even worth getting?
The answer depends on what you want to get out of them.
If you’re not applying for a loan in the near future, then there’s probably no immediate need to know your actual FICO. If you’re just trying to measure and monitor your creditworthiness then these other models – which are frequently referred to as FAKOs – can be useful for doing that. But are they worth paying for? That’s another question.
Personally, I wouldn’t pay for most of these services. Under certain circumstances, some may be worth it for the extra bells and whistles they throw in. However the vast majority are ridiculously overpriced. Think about it… $15/month equates to $180/year! That’s a lot of money, so carefully contemplate whether the service is actually worth paying for.
If you come to the conclusion it’s not worth paying for, there are various services out there like the aforementioned CreditKarma, as well as similar services like Quizzle, which provide their own non-FICO free of charge. Meanwhile, if it’s just your credit report that’s needed, head on over to AnnualCreditReport.com. There you can get your report for free from each of the 3 bureaus once per year.