While many consumers these days know that there is a large importance placed on their credit ratings when they attempt to obtain financing from a lender, it seems that in some cases, what they and the institution see for their scores are very different.
While lenders still rely heavily on consumers’ credit scores to both determine their eligibility for various lines of credit and to set the terms of that financing, there is occasionally a disconnect between what a borrower thinks their rating is, and what a financial institution sees, according to a new study published by the federal Consumer Financial Protection Bureau. In fact, somewhere between 20 and 27 percent of the time, consumers would likely receive a rating that was “meaningfully different” from that which is seen by a creditor.
The CFPB defines a meaningful difference as being one that would qualify the consumer for a different set of credit offers than what they eventually receive from a potential lender, the report said. These offers could either be better or worse than those they would be able to obtain based on the score they would have personally received.
“This study highlights the complexities consumers face in the credit scoring market,” said CFPB director Richard Cordray. “When consumers buy a credit score, they should be aware that a lender may be using a very different score in making a credit decision.”
When a borrower believes they have a different credit score than what lenders see, it can cause a number of issues to arise when they apply for credit, the report said. For one thing, they could be rejected by the lender, if the score they believe they have is higher than what the financial institution sees. This, in turn, could prompt them to continue to apply for more credit, which will take a toll on their credit score as a result of the number of hard inquiries sought within a relatively short period of time.
And even if they are approved for a line of credit, then they might not get the terms they may have expected to be quoted, the report said. On the other hand, when their score is actually better than what the lender sees, and they are not aware of where they stand, they may accept a line of credit that is less affordable than what they are qualified for in reality.
Reason for this trend
One possible cause of this discrepancy is that there is no way for consumers to see the same scores lenders see, the report said. As a result, many will end up going through their life simply unaware that their credit rating isn’t what they believe it to be, or worse, not know that there are different scores for consumers and lenders at all. As a consequence, many may not be able to fully understand their financial situation and eventually misjudge their standing when they attempt to apply for a loan or other kind of credit.
How borrowers can avoid it
The ways in which potential credit users might be able to sidestep this troubling trend is to simply take action they should be taking anyway, the report said. This includes shopping around for credit to make sure they know more or less what kinds of offers for which they may be able to qualify, as well as to give them the best possible idea of what constitutes the most affordable financing available. Not doing so may lead borrowers to take on accounts that might not have been optimal.
The CFPB will also enact new efforts to regulate the credit reporting industry beginning on September 30, the report said. The hope is that by overseeing the 30 largest participants in the industry, which combined account for 94 percent of all business in the field on an annual basis, they will be able to create a better and clearer environment in which consumers can understand and have full knowledge of all aspects of their credit standing.
Finally the agency also recommends that a consumer looking for a new line of financing take the time to order a copy of their credit report and check it closely to make sure there are no unfair markings on the document that may be having an adverse effect on their standings. Each consumer is, by federal law, entitled to one free copy of their credit report from each of the three major reporting bureaus every year, and therefore it is a good idea to take advantage of this ability. If you discover any errant entries on your credit report, you may be able to work with a credit repair law firm to get them cleared up relatively quickly.