5 Little Known Facts About Credit Reporting and Credit Scoring

In time you’ll learn that one of my favorite columns to write is the “mythbuster” piece.  I love debunking common, and not so common, myths about the credit industry.  So in the spirit of the myth-buster, please enjoy these little known factoids about the credit industry.

FICO Doesn’t Sell Scores to Lenders

The common belief is that when you apply for a loan the lender pulls your credit report from one of the credit bureaus and then gets your FICO score directly from FICO.  This is incorrect except for under rare circumstances when lenders use a FICO service called PreScore®.  The vast majority of FICO scores that are used by lenders are sold to them by the credit reporting agencies.

Each of the “Big 3” credit reporting agencies has a licensing agreement with FICO that allows them to sell FICO scores directly to lenders.  This means the delivery of your credit report AND FICO score is done at the same time by the same credit bureau.  Efficient.  And, because FICO doesn’t sell scores to lender…

FICO Doesn’t Score Your Reports

No, there is no direct pipeline between the credit bureaus and FICO where the bureaus transmit their credit files to Minneapolis (FICO’s HQ) for scoring before they’re delivered to lenders.  In fact, FICO isn’t even involved with the scoring process at all.  They FICO score is really scoring software.  And, the software is installed at each of the three credit reporting agencies that then use it to score their credit files.

I can tell you that this is so unknown that even some people who work for the credit bureaus don’t know this.  I’ve been in front of credit bureau audiences many times and when I asked them “So, who actually calculates the FICO score” their answer more times than not was “FICO does.”

Employers Do Not Use Scores

I’ve called this the myth of the decade that just won’t die.  So many people use the terms “credit score” and “credit report” interchangeably and it gets them in trouble.  Credit reports can be used for employment screening, in most states, but credit scores cannot.

All three of the credit reporting agencies and their trade organization, the CDIA (Consumer Data Industry Association), have stated repeatedly, even under oath, that they do not sell credit scores along with the reports they sell for employment screening.  But that just doesn’t seem to matter because it’s still being reported in the media and even politicians are making these claims.

Credit Scores Have No Memory

Credit scores are “real time”, meaning that just because your score was 700 today it doesn’t mean that it will be 700 tomorrow.  When a lender wants to pull your credit report and get your score they will make the request to one of the credit bureaus, who then compiles the credit report, calculates the score and then delivers the information back to the requesting lender.  All of this happens in seconds.

There is no mechanism whereby the score is “stored” by the credit bureaus and then re-used or redelivered at a later date.  The next time a lender wants your credit reports and scores the process takes place again with no memory or recollection of the previous event. And, because scores are not stored by the credit bureaus…

Credit Scores Are NOT A Permanent Part Of Your Credit Reports

Your credit reports contain a wealth of information about you.  Your history of credit obligations, collections, some public record information and a slew of personal identification data.  What they do NOT contain is your credit scores because credit scores are not a permanent component of your credit report.

Credit scores are products sold along with your credit reports to lenders and the other parties that use them.  They certainly aren’t the only product sold with credit reports but they surely are the most well known.  It’s because of this that they are assumed to be a part of the credit reports when, in fact, credit reports and credit scores are two completely different and independent items.  This is why you do not get a credit score for free like you can get copies of your credit report for free.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and the author of the “credit rating” definition on Wikipedia.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  He has served as a credit expert witness in more than 70 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.