FICO SCORES OR FAKO SCORES?

Differences between Consumer and Lender credit reports

Arguably the credit score is the most important factor when it comes to borrowing, lending, and the subject of loans. Behind every yes, no, and tier-based loan is a credit score. Today’s lenders decision power is regulated by that three-digit number. But let’s be specific, the credit scores that the lender uses is not the same credit score that we have access to as consumers.  The credit scores lenders use from the lending reports are an algorithm that is proprietary – a formula that has no competition in the lending industry. It’s the only score the lender can use and no one outside of it’s creator has or can get access to its very complex algorithms.   Consequently, the consumer is left with a mocked-up algorithm that is often much different than the credit scores the lender uses.

This subject comes up daily with our clients.  They have been quoting their credit scores and making financial decisions based on the scores provided by their consumer reports.  They are often disappointed to find out that the lender scores are far lower and now they are forced to unwind on commitments or to prolong their plans.  Or the opposite, they decide to put off home ownership unnecessarily and consequently renew their lease due to scores actually being higher than what the consumer scores report.

Anytime this subject comes up, it is followed up with a series of questions and often a series of contradictory answers. I hope to provide some clarity on this subject by equipping you with enough information to help you discern through this mess.   Let’s start by comparing the two different types of reports.

Consumer versus Lender Report Content

When comparing the individual consumer report to the lender report, assuming pull dates are the same, the credit history will be the same.  However, many monitoring reports from companies like Credit Karma may only provide one or two of the three major Credit Bureaus. Consumer Reports from free credit monitoring companies will also have limited information outside of the tradeline details. Whereas a report from the Credit Bureaus themselves, would provide the same information as a lending report such as address, job history, and full account numbers coupled with tradeline address details. Also, unique from all others, consumer credit reports directly from the credit bureaus also include a history of soft inquiries and a list of credit checks claimed to be for promotional reasons. It’s common to see significant differences of reported trade lines between one bureau versus the other. When comparing consumer reports to lender reports, each individual credit bureau is relevant, however, the consumer credit scores versus the lender credit scores can be far from the same.

Consumer scores

Most of the consumer monitoring companies we see today, and the scores provided by our credit card companies or our banks, use an algorithm called Advantage score 4.0. This is a score-based algorithm privately owned and created to provide or attempt to provide a similar credit score that the lenders pull. FICO themselves, have a consumer report they sell to consumers that uses an algorithm called FICO 8, which we will talk more about later, and the new urban term for these scores are commonly referred to as the FAKO scores.

Lender scores

Lender credit reports use a very specific and unique algorithm for each of the three major credit bureaus to calculate credit scores.  The Fair Isaac Corporation also known as FICO, owns these three algorithms and no one outside of FICO has access to them.

Why the difference? It’s not out of effort. Other companies have simply not been able to match the complex algorithms, which changes often. And as far as FICO is concerned, it would be like sharing the ingredients of Joe Schmo’s secret BBQ sauce.  Its proprietary, it’s business.

Even FICO themselves had to come up with a consumer-based algorithm when they decided to get into the ever-growing credit monitoring business. They would seemingly have an edge here, as their name alone would imply that the scores provided would be accurate. I’m not sure of the internal details but even within their own divisions of their company, the algorithm is kept under lock and key. Why cannibalize their own business by leaking or exposing the scores on a consumer level? Or risk reversing the algorithm? And even now, being a giant player in the consumer monitoring reports is small fry compared FICO’s tight grip as they are the sole provider of lender scores. There are several more “zeros” in comparison when you consider that FICO gets paid for every loan application in America. FICO states they’ve simply “cornered the market”.  More like dictate the market – smells like a monopoly to me, but that makes for a different rant.

You might recall in January of 2017 that Equifax and TransUnion were fined 23 million dollars for false advertising from their own consumer monitoring businesses by implying their consumer reporting came with accurate lender scores. See news report here. As well as upselling these FAKO scores to the consumer, whenever the consumer requested their free credit report they duped the consumer into believe their credit scores were the same scores the lender uses when in fact, they were using the same advantage 4.0 credit scores that credit karma and most others use. Of course, consumers thought since they were getting their credit reports directly from the Bureau that they’d get the lender scores as well. But what most consumers don’t know is that the credit bureaus are completely separate from FICO and even the president of TransUnion himself can’t get a true FICO!

Currently, there are no loop holes in getting true lender scores – regardless of where you purchase them from on a consumer level. You can’t get them from the Credit Bureaus nor FICO themselves!

Hard Inquiry vs Soft inquiry.

Quick note – when a lender report is pulled, it will show to be a hard inquiry and can affect your overall score.  However, a consumer report will not count against your credit and this is also known as a soft pull and/or soft inquiry.

What about getting a free credit report per year!? That’s the law! What about my scores?

FICO is not governed. The FCRA that protects consumers and regulates reporting does not govern the credit score itself.  There are currently no laws that allow the consumer to get access to their real FICO lender-based scores. This is crazy since the scores can be more important than the credit itself! FICO says, “Our scores are only as accurate as the information provided.”  Unless they are miscoding information – which they do often – currently, there’s nothing we can do about it.

Are consumer scores lower or higher than lender scores? I’ve heard, and read, so-called experts state they’re lower while others say they’re higher. And I’ve even heard it said that consumer scores range from 200-1000, compared to the 400-800 model we’re familiar with. Blah blah blah.  NO! None of that is true.

I don’t believe there is another human being alive that has compared as many lender scores to monitoring scores as I have. Due to our niche in this industry, our clients are provided with both –that means we’ve provided literally tens of thousands of these scores over the last 9 years. I’m like the rain man when comes to finding patterns, but the suggestion that one score being lower or higher than the other isn’t even close to being accurate.  Turns out that some scores are higher, some are lower, and some are close. And this can vary from one month to the next for the individual. So, the moral of the story is this – don’t believe any of the hubbub.

How can consumer scores benefit me if they aren’t accurate?

Consumer scores can make for a practical barometer of score progressions and regressions. Although it’s not accurate on point differences, just the movement of swinging up or down can help alert attention to a new derogatory or to highlight the positive. A new derogatory will create such a score drop that the drop alone would demand attention, as opposed to reading a full credit report and easily missing the new ding due to the amount of information in the report.

Note: On consumer reports I have seen some major drops, due to some subtle changes compared to very little changes with the actual lending scores.  Changes like closed installment accounts, updated derogatory dates, and inquiries are responsible for quite a panic attacks which upon further inspection, you’ll find only minimally drop in the lender’s score if at all.

When alerted to a significant drop in your consumer scores, look for any new collections, late payments, and check your credit card balances as these could have caused the drop. Expect the same significant drop in the lender scores as well and this will need your immediate attention.  However, know that the consumer scores are notorious for reporting exaggerated drops for otherwise subtle changes such as a closed account.

If the giant credit bureaus are governed due to the major impact it has on the economy and a person’s financial life, then you’d expect that the far more important credit score would be as well. However, nowhere in the 162 pages of the FCRA (Fair Credit Reporting Act) is it included.  Nor does it fall under any other regulations. This subject has been brought up in the past and FICO simply replies with, “our scores are only as good as the information provided,” and that’s where the argument stops. That is not even an accurate statement since there are several miscoding errors despite accurate information.  How about providing, at the very least, a free lending score once a year like the credit reporting agencies are required to. The exact reasons why they enacted this law would apply in this situation as well.

Until this is dealt with, our options are to write to our congressmen, maybe post random blog rants, and file complaints to the FTC.  Unfortunately, change won’t be quick but these are the tools we have and this is the system we are under. What things should be, doesn’t make a difference in our lives right now. Despite the mystery, the differences, and perhaps even the scandal – the basics are the same – make your payments on-time, avoid new collections, and keep your credit card balances in check.

Also, when making decisions on major financial purchases, don’t base them off your consumer scores or how those scores will affect your loan details.  Use them as a guide only and when you get serious about making that financial step, get counsel from your lender and perhaps it’ll make sense to pull a lender report at that time to determine your next move.

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Dennis Hubbard

Veteran of loan origination since 1994. Speaks fluent FICO with a redneck accent. Assisted thousands in achieving and exceeding their credit goals since 2009. Expert in state and federal laws regarding collections, credit, and loan origination. Pushes all the right buttons to make people and systems move. His principles and methods of the scoring process can only be heard here at Credit Firm Inc - The only credit consulting company that guarantees a credit score goal.

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