Anyone thinking about borrowing money should request a copy of their credit report, as well as their credit score. This is especially true if they've borrowed money before, and the repayment pattern has been less than timely.
In this article, we're going to walk through our experience with three companies claiming to offer free credit scores. As part of that discussion, we'll first explain the difference between a credit score and a report. Then we'll explain how to obtain a score, the application process, and the information available from these service providers. Finally, we'll talk about offers of free scores that come with a steep price.
Credit Scores and Reports
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There are three credit bureaus that nearly all lenders use: TransUnion, Experian, and Equifax. Each of these agencies provides lenders with services that include:
Risk Management: using proprietary models, identifying for creditors those individuals that present a repayment of debt risk.
Credit Reporting: supplying historical reports, detailing a potential borrower's total debt load, mix of credit, as well as payment patterns.
Credit Scoring: publishing simple numeric scores, allowing lenders to quickly measure the creditworthiness of new customers.
The differences between these last two services are important to understand. It's been well publicized that individuals are entitled to free credit reports. In fact, it's possible to obtain one from each of the three credit bureaus every twelve months.
Unfortunately, free credit reports are often mistaken for scores. The reports contain information that is subsequently used in developing a score. Therefore, obtaining one is useful to consumers wishing to understand the basis for their scores, as well as providing the opportunity to correct errors in their report.
Credit scores allow lenders to quickly assess the creditworthiness of a loan applicant. The higher the score, the lower is the risk of default for a potential borrower. Applicants with higher scores may be able to obtain more favorable loan terms (lower interest rates). So while understanding the information contained in a report is important, it's valuable to understand if that information translates into a high score.
Calculating Scores
While all three credit bureaus may use proprietary calculations to develop a person's credit score, the weights are based on the FICO method, which consists of:
Payment History (35%): late payment patterns and bankruptcies can hurt payment history, while on-time payments help.
Outstanding Debt (30%): the total of all money owed to creditors, as well as the amount used versus the total made available.
Overall Credit History (15%): the number of years the consumer has been borrowing money from lenders, or revolving accounts with credit card companies.
New Credit (10%): the more frequently someone applies for credit, the lower their score. While it's important to build credit history, aggressively seeking new lines of credit is a negative.
Other Factors (10%): the mix of credit and loans the borrower has used in the past and present.
Later on we'll see how one of the companies uses the above information to help consumers understand the action they can take to improve their score.
Companies Offering Free Credit Scores
This research was conducted back in 2010, and while the process may evolve over time, the lessons learned here can be extended to new processes. The companies that claimed to offer free scores included Quizzle.com, CreditKarma.com and Credit.com.
Quizzle.com
The process begins by filling out your name, email address, and zip code. You're then sent an email that contains a link used to help verify identity. Step two of the process includes supplying your date of birth, the date you purchased your home (if you own one), as well as the purchase price of the home.
You're also asked to complete information about savings in the bank, the amount of time you intend to stay in your home, annual household income, and the type of mortgage you might have outstanding. All information must be supplied to move to the next step in the process.
You're then presented with a screen containing information that needs to be completed in five minutes or less. Your response to the questions appearing on the screen is used to verify your identity. Information typically includes bank accounts, prior addresses, and previous loans.
Once your identity has been verified, you're presented with your credit score (obtained from Experian) as well as grades for your Credit, Budget, Home Value, Mortgage, and a Rainy Day Fund (money you have saved). The grades you get in each area are calculated based on information in your credit report, as well as the responses to earlier questions. Quizzle also provides a link to your credit report.
CreditKarma.com
The first step at Credit Karma is to create an account by supplying your name and email address. Once again, you'll receive an email that will continue the process of identity verification. In the second step of this process, you will need to supply your address, a telephone number (only used to pull the credit score), date of birth, and Social Security Number.
Once completed, Credit Karma will provide you with your free credit score. In this case, the score is provided by TransUnion. You'll then be presented with several interesting bits of information including how the score ranks when compared to a national distribution. Based on this information, you'll also get a qualitative feel for how creditors would rate your creditworthiness on a scale that ranges from Very Poor to Very Good. Your score will be compared to Credit Karma's community, the state in which you reside, as well as your age. You'll also be presented with a series of offers from lenders.
Credit.com
As was the case with the previous two offers, Credit.com requires you to create an account. This time you need to supply your name, address, Social Security Number, Annual Salary, and a Financial Goal. Once again, you will be sent an email to begin the identity verification process. The second step involves answering a series of questions about your mortgage lender, employer, address, prior residences, and revolving credit lenders.
As was the case with Credit Karma, Credit.com pulls your report from TransUnion. Unlike the prior two services, this site does not provide a score. Instead they provide a rating on a scale that ranges from Bad to Excellent.
The information you're presented with is organized by the FICO approach mentioned earlier (Payment History, Debt Usage, Credit Age, Account Mix, and Inquiries). In each of these categories, you're supplied a grade as well as a brief recommendation aimed at helping to boost your grade.
Unfortunately, the only way to get your actual score is to sign up for a free credit monitoring service trial offer. Once the 30-day trial is over, you'll be charged around $15 per month for the monitoring service.
Not-So-Free Scores
This last example is something people see all too often nowadays. It's an offer of something for "free" that comes with a potentially high price tag. While it is possible to find a website offering truly free scores, you're also going to run into a lot of websites that require you to sign up for a service using a credit card.
Free scores will likely be bundled with credit monitoring or identity theft services, since the three offerings are very much related. Marketers can afford to provide these services because they know many consumers will fail to cancel their membership after the 30 day trial is over. After three months, it has cost $45 for something that was supposed to be "free."
The offers by Credit Karma and Quizzle are a bit more subtle. By asking for financial data as part of the identification and verification process, they can better target offers from lenders and other creditors to qualified individuals.
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