The credit score you buy may not be the credit score your lender uses when you apply for credit and, fortunately, most of the time it doesn’t matter.

However, for what the Consumer Financial Protection Bureau (CFPB) considers a “substantial minority,” the difference could make or break a mortgage application or application for other credit.

In from 1 percent to 24 percent of the time, the difference between consumer-purchased and creditor-purchased credit scores could toss consumers into one, two or more different credit-quality categories.

Which way the score goes, better or worse, often isn’t clear.

The CFPB’s new ”Analysis of Differences between Consumer- and Creditor-Purchased Credit Scores”is a follow up to CFPB’s report earlier this year, ”The Impact of Differences Between Consumer- and Creditor-Purchased Credit Scores,” which revealed the different sources and types of credit scores and potential for harm associated with the differences.

The new report attempts to quantify the impact of those differences and says consumers do not know ahead of time whether the scores they purchase will closely track, vary moderately or vary significantly from a score sold to creditors.

What’s a credit score?

Credit scores are a numerical representation of your credit report. The lower the score, the worse your credit and the greater your risk for default on credit. Conversely, the higher the score, the lower your risk. How you handle your credit raises or lowers your score.

Lenders widely use credit scores to make a decision about your application for most types of credit, including mortgages, auto loans, credit cards, personal loans and others. Credit scores are also used to make decisions about insurance, rental applications, even jobs.

Scores also determine if your creditor will raise or lower your credit limits, change your interest rate or cut you off from existing credit. High credit scores will also get you the best credit rates and terms, while low scores will make you pay more for credit — if you can get it.

By federal law, credit scores are free under certain circumstances, typically after the fact, say, because a lender rejected your application.

Otherwise you pay $10 to $20 for the privilege of buying your score, often from companies that attempt to sell you other questionable services bundled with your credit score purchase.

Purchased credit scores aren’t gospel

CFPB’s new report advises consumers not to rely upon purchased credit scores as a guide to how creditors will actually view their credit quality.

Because credit scores can vary from the scores actually used to approve or decline credit, consumers have no way of knowing if the purchased scores are the same, higher or lower than those used by creditors.

• If a purchased score leads the consumer to overestimate lenders’ likely assessment of his or her creditworthiness, the consumer might be likely to apply for credit lines that would not be approved, with a cost of wasted time and effort on both the consumer’s and lender’s part.

• A consumer who underestimates a lender’s likely assessment of his or her creditworthiness, might fail to or delay applying for credit to buy a house or a refinance.

A consumer might also apply to lenders who offer less favorable terms than the borrower is qualified for or accept a less favorable offer than necessary.

The study also admonishes and advises firms selling scores to consumers to disclose to consumers those credit score differences and the potential impact from those differences.

Given the CFPB’s new oversight on consumer financial matters, including the operations of consumer credit reporting agencies, regulations to mandate such disclosures are likely.

The Dodd-Frank Wall Street Reform and Consumer Protection Act directed the Consumer Financial Protection Bureau (CFPB) to compare credit scores sold to creditors and those sold to consumers by nationwide credit reporting agencies to look at the differences.

CFPB analyzed credit scores from 200,000 credit files from each of the three major nationwide CRAs: TransUnion, Equifax, and Experian.

CFPB found:

• Different scoring models would place consumers in the same credit-quality category 73 to 80 percent of the time.

That is, if a consumer had a good score from one scoring model, the consumer likely had a good score on another model.

• Different scoring models would place consumers in credit-quality categories that are off by one category 19 to 24 percent of the time.

• Different scoring models would place consumers in credit-quality categories that are off by two or more categories from 1 to 3 percent of the time.

Published: October 4, 2012