Do Too Many Free Credit Scores Confuse Consumers?

Published

February 19, 2015

Bob Sullivan is author of the New York Times best-sellers Gotcha Capitalism and Stop Getting Ripped Off. His stories have appeared in The New York Times, the Wall Street Journal, and hundreds of other publications. He has appeared as a consumer advocate and technology expert numerous times on NBC's TODAY show, NBC Nightly News, CNBC, NPR's Marketplace, Terry Gross' Fresh Air, and various other radio and TV outlets. He helped start MSNBC.com and wrote there for nearly 20 years, most of it penning the consumer advocacy column The Red Tape Chronicles. See more at www.bobsullivan.net. Follow Bob Sullivan on Facebook or Twitter.

Credit scores and credit reports have been somewhat of a mystery to the public for decades, but now U.S. consumers are gaining unprecedented access to them. The new transparency is undoubtedly positive, but a critical question remains: Will it help consumers, or just confuse them?

The Consumer Financial Protection Bureau announced Thursday that some 50 million U.S. consumers now have free access to one of their credit scores – mostly through their credit card issuers. This has increased the level of consumer awareness around the credit system, but it also creates another need: Consumers need context in order to make sense of the scores.

To see how well consumers understand credit reports and scores, the CFPB recently conducted focus groups in Boston, St. Louis, Atlanta and Seattle. Extensive interviews revealed what you might expect: there’s plenty of confusion around the three-digit number that has such a big impact on consumers’ lives.

The CFPB found that consumers:

Found it difficult to “disentangle” credit reports and credit scores;
Said they knew about the three largest nationwide credit reporting agencies, but were hard-pressed to name all three;
Were puzzled when they encountered differences in information across their various reports;
Thought they knew what raises or lowers credit scores, but still felt that their scores were not completely within their control;
Said they understood that multiple scores exist, but seemed unclear about which ones lenders use or how;
Were unsure if requesting a copy of their credit report would be considered a hard inquiry and thus could negatively affect or “ding” their credit scores (it doesn’t);
Reported feeling “overwhelmed” — a few consumers were surprised at the amount of information on their report;
Said that they were confused by the names of financial institutions that appeared on their credit reports, because the financial institution went by a name the consumer wasn’t familiar with;
Indicated that they learned from their credit reports that their loans had been sold or were being serviced by companies other than the lender from which they obtained their loans;
Distrust the sources of their credit reports. Some are not sure which website or sites provide free annual credit reports. “Even if they know to use AnnualCreditReport.com … They are reluctant to enter their Social Security number and other private information, because they fear that this may put them at risk for identity theft”;
Fear being trapped into purchasing unwanted products, like an additional report or a credit-monitoring service.

The CFPB urged credit reporting agencies to make it easier for consumers to access and interpret credit reports and scores.

“Consumers’ credit information is the foundation of their financial lives,” said CFPB Director Richard Cordray. “Access to these scores provides an opportunity to engage consumers around their credit reports. Once consumers see their credit scores, they can be motivated to learn more about their credit history, check their full credit report, and take action to improve their financial lives.”

There are various free tools available to consumers to help give context to their credit scores — such as on Credit.com, which offers two free credit scores every month and an explanation of what factors are influencing your scores. Once consumers understand why their scores are what they are, and what behaviors build good credit, they can take the steps that will help them improve it.