Why Your “Free” Credit Score Isn’t Worth Paying For

Today, offers to get your “credit score” for free are everywhere. When you rely on this free credit score, however, you find it can vary significantly from the credit score used by a lender making a credit decision. Why? Because these scores are just estimates of your general credit worthiness, and not the credit score used by your lender to make credit decisions.

What is Your True Credit Score
When making a lending decision, lenders only use credit scores provided by a limited number of organizations. The most widely used score is your 3 digit FICO score calculated (and owned) by a company called Fair, Isaacs (the 5 categories that make up your FICO score are discussed later in this blog). The 3 national credit reporting agencies – Experian, TransUnion, and Equifax – in addition to providing your credit report will also provide a 3 digit credit score that each calculates using its own proprietary formula.

Virtually every lender in the US only uses your FICO score or one or more of the scores provided by the 3 national credit reporting agencies when making a credit decision. Lenders may make a credit card or auto loan decision based on a single credit score, while others such as mortgage lenders often will look at multiple scores. Not surprisingly, each of these scores – since they are calculated using different formulas – will vary somewhat. Also not surprisingly, since lenders pay for the right to access these scores, none of the organizations that own these scores will give them away for free…even to you.

What about the Free Scores
The free scores you see advertised are simply estimates of your general credit worthiness and are different from the credit scores lenders actually use, although they may appear similar. Consumer reporting agencies and other companies sometimes use an estimated score to illustrate a consumer’s general level of credit risk. How can you tell whether a score is estimated? Ask the company if the score is used by most lenders. If it’s not, it’s likely to be an estimated score.

Why do Fair, Issacs and the 3 national credit reporting companies charge you for their credit scores while other companies give you theirs for free? Basically, 2 reasons.

First, Fair, Issacs and the other companies charge for their credit scores because they can. Lenders find those scores useful in making credit decisions, so they will pay for them. On the other hand, lenders do not find the other estimated scores valuable and will not pay for them.

The other reason, of course, is because most, if not all of these other companies are actually trying to sell you credit monitoring services for anywhere from $8.95 to $14.95 per month. The “free credit score” is their hook to get you on their site and get your credit card information.

Don’t be fooled. If you want to see the credit score that lenders use to make credit decisions about you, go to one of the 4 companies that provide those scores and pay the $14.95 or so it costs to get it. For example, at www.myfico.com, you can get your FICO score for $14.95.

The 5 Parts of your FICO Score
These are the 5 general categories that make up your FICO score.

1. Your payment history is about 35% of your FICO score – if you pay your bills on time, this improves your score and, if not, it hurts your score.

2. How much you owe is about 30% of your FICO score – FICO scores are calculated in part based on the amounts you owe on all your accounts, the number of accounts with balances, and how much of your available credit you are using. The more you owe compared to your credit limit, the lower your score will be.

3. Length of your credit history is about 15% of your score – generally a longer credit history increases your score, but a short history can get a high score if it shows good credit management.

4. New credit is about 10% of your score – If you have recently applied for or opened new credit accounts, your credit score will weigh this fact against the rest of your credit history. If you need a loan, do your rate shopping within a focused period of time, such as 30 days, to avoid lowering your FICO score.

5. Other factors are about 10% of your score – Several minor factors also can influence your score. For example, having a mix of credit types on your credit report is normal for people with longer credit histories and can add slightly to their scores.

Want a Free Copy of your Credit File?
Go to www.annualcreditreport.com. This site, set up by the government, allows you to request a free credit report, once every 12 months from each of the 3 national consumer credit reporting companies: Equifax, Experian and TransUnion. But remember, you can get your credit file for free, but not your credit “score.” That will still cost you.

If you are a restaurateur who wants to increase sales, enhance marketing, make capital expenditures, or otherwise invest in your business and are looking for a restaurant loan, try Advance Restaurant Finance, LLC (ARF). ARF has been making short term business loans to restaurants for almost a decade. Despite the economy, ARF never stopped making business loans to restaurants, and ARF makes restaurant loans up to $1,000,000 per location. If you are looking for a restaurant loan, ARF is one the first call you should make. ARF is a lender you can trust, and our team of experienced hospitality specialists provides straightforward funding solutions with a streamlined funding process, professionally and personally.