Should You Learn From the Government Fining of Equifax, TransUnion

Sometimes, there’s a personal finance lesson to be gleaned from the decisions made in Washington, D.C.

Here’s one example: The Consumer Financial Protection Bureau fining two credit-reporting bureaus, Equifax and TransUnion, in January. If these names sound familiar, it’s because they’re two of the three bureaus – along with Experian – from which you can request your free yearly credit report at annualcreditreport.com.

The CFPB, which charged the companies more than $23 million in restitutions and fines, penalized the credit-reporting bureaus for several missteps: First, for overstating the usefulness of the scores they sold, and second, for luring customers into pricey monthly subscription services. The CFPB also dinged Equifax for requiring customers to view advertisements before seeing their free credit reports, a violation of the Fair Credit Reporting Act.

Confusion surrounding credit can lead people to lower their scores by mistake.

“Credit scores are central to a consumer’s financial life and people deserve honest and accurate information about them,” said CFPB Director Richard Cordray, in a prepared statement when the penalties were announced.

But while the action against the bureaus may seem far removed from your own financial life, there are lessons that savvy consumers can take away from it. Here are your rights – and some red flags to be alert for – when checking your credit score.

You don’t always know what score a lender is using. Part of the action against Equifax and TransUnion revolves around the fact that both companies led customers to believe that they were accessing the same credit scores that lenders like, say, credit card issuers, use to make credit decisions.

That’s misleading, experts say. “Unless you are turned down for credit [when a lender must disclose your score], the score you see from any other source is not necessarily the score the lender is using,” says Gerri Detweiler, head of market education for Nav, a credit service for business owners, based in San Mateo, California.

Yes, a solid credit score is a crucial component to being approved for credit. But the truth is that lenders use scores from a variety of sources, sometimes integrating their own proprietary formulas. So, the likelihood that you are going to buy the exact same score variation that any given lender will use is remote, says credit expert John Ulzheimer, who formerly worked with FICO and Equifax.

But, Ulzheimer notes, the scores sold by Equifax and TransUnion weren’t without value. TransUnion’s VantageScore is commercially available to lenders and may be used by some to determine creditworthiness, he says. And having a high credit score through TransUnion or Equifax still points to the likelihood that you have a high credit score elsewhere.
If you have to input your credit card information, the service probably isn’t free. The CFPB also based its action against the two credit bureaus on the fact that consumers thought they were signing up for free or $1 credit scores. In actuality, consumers were signing on to a limited-time trial after which they were automatically enrolled in a subscription program and charged $16 or more each month.

A major takeaway from this applies to virtually any consumer service. “If you’re going to be entering a credit card number, then there’s probably going to be a cost to it eventually,” Detweiler says.

Sometimes, these paid credit services are useful, Detweiler says. For example, consumers may want to sign up for paid identify-theft protection or credit-monitoring services. But don’t get sucked into signing up for a credit subscription you don’t need, want or use.

“In the world of online credit-related services and products, there are two definitions of the word ‘free,'” Ulzheimer says. “There is Webster’s definition, and there is a definition that includes things like ‘conditionally free.'” Having to input credit card data hints at the fact that the service is only free up to a point, Ulzheimer adds.
There are plenty of free ways to get your credit score. When it comes down to it, you shouldn’t be paying for a credit score these days anyway, credit experts say. “I can’t believe consumers are still buying credit scores,” Ulzheimer explains. “There are so many ways to get free credit scores. I can’t believe people are shelling out money at all.”

Sites, such as Credit Karma, Credit.com and Credit Sesame, may hand out free scores (in exchange for registering with your personal information). Your credit card issuer may also include a credit score with your regular statement.

The fact remains: You shouldn’t need to pay for your credit report, a document outlining your outstanding debts and payment history. You’re still owed a free credit report once per year from Equifax, Experian and TransUnion.