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FICO Or FAKO? The Limitations of Free Credit Scores

Author: Matthew Taylor

First, there's something you should know about the scores you get from free credit scoring services: They usually are not the same FICO scores lenders pull. The free scores are sometimes called equivalency scores or educational scores (and, derisively, FAKO scores). In this article, we'll examine the reasons for the differences between the free scores you can get from websites like Credit Karma, Quizzle, Credit Sesame, and some credit card companies and the credit scores that lenders use. (Learn more about these sites in Top Websites To Check Free Credit Scores.)

Lenders Use Tailored Credit Scores

First, let's clear up a misconception. The free credit scores are, in fact, real. But for several reasons, they may only give you a general idea of where you stand with a particular creditor.

Different lenders pull different credit scores, and sometimes these scores are tailored specifically to the type of loan you're applying for. For example, TransUnion's Account Management Model is designed to help institutions evaluate their existing accounts, identify their most profitable account holders and discern which account holders are most likely to become delinquent. while the TransUnion New Account Score, available free from Credit Karma, helps financial institutions identify the risk posed by prospective customers. TransUnion even has credit scoring models for specific types of lenders and creditors, like auto lenders and utility companies.

Experian has different scoring models as well. The Experian National Equivalency Score, available to customers of the free credit score website Credit Sesame, is a score financial institutions use to screen their offer solicitation lists, evaluate loan and credit applications and identify opportunities to sell more financial products to existing customers.This score can range from a low of 360 to a high of 840, while FICO scores range from 300 to 850. Equifax offers customized credit scoring models as well. The only way to find out the exact score a particular lender sees for you is to actually apply for that loan.

Each Credit Bureau Has Different Data

Another limitation of getting your credit score from only one is that your score with each of the three credit scoring bureaus is usually different. The different scores are due to variations in which bureaus creditors and lenders report your activity to. Lenders can choose whether to report to one, two or all three of the three major credit bureaus, or they can choose not to report at all. In addition, each bureau weighs the data in your credit report somewhat differently when calculating your credit score. Further, a lender might pull your scores from all three credit bureaus, or it might just pull one. When you only know your score with one bureau, you aren't seeing the whole picture.

Some Lenders Use VantageScore, Not FICO

The VantageScore, available to customers of the free credit score website Credit Karma, is a newer scoring model created by a collaboration among the three major credit bureaus. They wanted to create a score that is more consistent from one bureau to the next and more accurate compared with traditional FICO scores. While the VantageScore is not nearly as widely used as the traditional FICO score, which 90% of lenders use, it may catch on because of the ways in which it makes up for the shortcomings in the traditional models. According to the VantageScore company, seven of the top 10 financial institutions, eight of the top 10 credit card issuers, six of the top 10 auto lenders and all of the top five mortgage lenders use this score for some purpose. A key way in which this score is different from traditional FICO scores is that it includes consumers who otherwise wouldn't have credit scores because their credit histories are too new or because they use credit too infrequently. It also excludes collection accounts that have been paid off.

The original VantageScore ranges from 501 to 990 and also gives consumers a letter grade from A to F. The newest model, VantageScore 3.0, scores consumers using a range from 300 to 850, just like a FICO score. VantageScore 3.0 is available to customers of the free credit score website Quizzle. Both of these VantageScores assign different weights to the five factors that determine your credit score, as compared with traditional FICO scores.

Different scoring methods assign different weights to the factors that determine your credit score:

VantageScore and VantageScore 3.0 criteria, ranked

Payment history (32%)

Credit utilization (23%)

Credit balances (15%)

Depth of credit (13%)

Recent credit (10%)

Available credit (7%)

FICO Score criteria, ranked

Payment history (35%)

Amounts owed (30%)

Length of credit history (15%)

New credit (10%)

Types of credit in use (10%)

Just as each of the three major credit bureaus issues its own FICO score based on the consumer's information with that bureau, each of the three major credit bureaus issues its own VantageScore based on the consumer's information with that bureau. A VantageScore from TransUnion will be the same as a VantageScore from Equifax if both TransUnion and Equifax contain identical information on a consumer. Since there are usually differences in the information reported to each bureau, consumers can still have different VantageScores, just as they can have different FICO scores.

The Bottom Line

With any free credit score, it's important to understand the limitations of what you're getting – most importantly, that the score you see might not be the same one a lender or creditor will use when deciding whether to take you on as a customer. The best type of free credit score to get is an actual FICO score from Experian, Equifax or TransUnion, because these are the scores the vast majority of lenders use. Still, you won't know exactly what score a particular lender uses unless you apply for a specific loan.

Disclosure: The author has no holdings in any of the companies mentioned in this article.

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