The dysfunctional state of the US consumer credit-score model

Ever stroll into a car dealership, confident your 720 credit score would earn you a great interest rate, only to find out that the figure the dealership pulled is 50 points lower than what your “free” credit report — or the free one provided to you by your credit card company — quoted you?

You’re not alone. Many consumers cautiously monitoring their credit report are getting tripped up by lenders who pull figures contrary to the score on free reports.

The reason for the discrepancy: According to loan industry experts, there are hundreds of different credit-scoring models circulating in the marketplace today, offered by the slew of credit and financial platforms advertising free credit reports. But the algorithms used by these companies aren’t based on the same risk criteria as FICO, the model most often used by lenders to determine if a candidate is creditworthy and created and managed by analytics company Fair Isaac. As a result, scores can swing either way by a hundred points or more.

“Ninety percent of lenders use FICO,” said Lisa Haydon, senior loan officer at Greenway Mortgage in Middletown, New Jersey. “When my clients get their credit reports through a [free credit platform], they don’t use the same type of formula,” she said. “They are angry when they learn that their 800 score that a [credit card company] quoted them is really only a 720 through myfico.com.”

Consumers also need to understand that one score does not serve all purposes, Haydon said. Every consumer has three scores, one from each of the three major bureaus (Equifax, Experian and TransUnion). But that’s a base score. Those credit scores will fluctuate according to the type of loan a lender is pulling your credit for, whether it’smortgage lending, auto lending or credit card lending.

That’s because the algorithm used to determine an applicant’s risk potential for a credit card is much different than the algorithm used to determine the creditworthiness of an individual applying for, say, a mortgage or an auto loan, Haydon said. So the free score you’re provided is not accurate for all the sectors, she explained. When a lender pulls your credit, they pull it specifically for the type of loan you are applying for.

“I tell clients I won’t give them a preapproval letter off a quote from Discover, because the mortgage system and the credit card system is a different kind of animal,” Haydon said.

For an added fee, myfico.com provides consumers with separate risk potential ratings for each of the sectors, she said, “but most people don’t know to ask for this.”

Credit management expert Diana Nichols, founder and president of Gold Key Consulting, agrees that the wide discrepancy across the credit industry is causing tremendous confusion — and anxiety — for consumers.

“There needs to be one standard,” she said. “It’s maddening.Consumers rely on the score they are provided and expect the interest rate associated with that score, only to be disappointed when their lender pulls a different number.”