Personal Finance

The Free Annual Credit Report Scam Job

| by PhilipTirone

The website that provides a free annual credit report is a giant racket. was created in response to a federal consumer-advocacy law intended to help people gain critical access to their credit information. But the website is anything but consumer-friendly.

The Free Annual Credit Report Scam

Though the website provides a free annual credit report, it will charge you for your credit score. And be forewarned: This credit score is useless. It bears no resemblance to the credit score a lender would use to determine your creditworthiness.

Let me explain the free annual credit report rip-off by starting with a brief credit lesson.

The formula that determines how your credit scores is calculated will change based on who is pulling your credit report.  A bank considering your mortgage application is interested in different factors than a landlord considering your rental application. The formula takes these different factors into consideration, spitting out a different score accordingly.

Almost all lenders—about 90 percent—use something called a FICO score. Not a single one uses the Consumer score.  

Let me repeat that. Not a single lender uses the Consumer score. In fact, no one other than the consumer would ever see a Consumer score. A landlord checking your credit history wouldn’t even bother looking at this score.

But if you buy your credit score from the free annual credit report website, you will be given your Consumer score, which is based on a generic formula tailored for you, the consumer.

Trouble is, this score is drastically different from your FICO score.

I tested the two scores on my own credit score. One day, I bought my FICO score from the only website that sells FICO scores. I also bought my Consumer score from the free annual credit report website.

On the same exact day, my Consumer score was 237 points higher than the FICO score that a lender would consider.

Think I’m the exception?

I decided to ask around for some guinea pigs. Mike and Jocelyn, a couple from Los Angeles with a 14-month-old daughter, rent a duplex and are considering buying a home in the not-so-distant future. They did their research and learned that lenders provide the best interest rates to borrowers with 720 and higher credit scores.

We decided to pull their Consumer TransUnion scores and their FICO TransUnion scores on the same day.

The results? Mike’s Consumer score was 872, and Jocelyn’s Consumer score was 745.

Jocelyn was pleasantly surprised. If Mike and Jocelyn decided to buy a home, they could expect a low interest rate, right?

Not so fast—we hadn’t looked at their FICO scores yet.

While Mike’s FICO score was 79 points lower than his Consumer score, it was still excellent: 793. But Jocelyn’s FICO score was 691, a 54-point difference. Though a 691 FICO score is considered decent, lenders certainly do not consider it great, nor do they provide the best interest rates to people in this category.

When a couple applies for a loan together, lenders use the lower of the two scores. This means that Jocelyn’s 691 FICO score is the score a lender would use to determine the couple’s interest rates on a mortgage.

Imagine what would have happened had Mike and Jocelyn relied on their Consumer score when they started their house hunt. Like many couples, they probably would have estimated their monthly payments using an online mortgage calculator to determine their interest rate.

“Based on the Consumer scores we got from the free annual credit report website, we would have thought we qualified for the best interest rates,” said Mike. “We would have been totally unprepared to pay the higher interest rate based on our FICO scores.”

The free annual credit report website would have given the couple an artificial picture of their creditworthiness. And they would have expected to pay about $12,000 less than the actual interest for a $300,000, 30-year, fixed-rate loan.

Indeed, sticker shock would have been the least of their concerns. In today’s market, some lenders will not approve a loan application for someone with a 691 credit score.

Even in the best-case scenario, Jocelyn would have been unable to take the steps to increase her credit score. Instead, the couple would either be forced to postpone their house hunt, or pay $12,000 more.

If Consumer scores were always lower than FICO score, the discrepancy wouldn’t be as problematic. Based on an artificially low score, you could work hard to build your credit score, and then be pleasantly surprised with the interest rates available to people with higher FICO scores.
But the Consumer score is almost always higher, and this gives people false hope.
While FICO scores range from 300 to 850, some Consumer scores are based on a scale that ends at 990. And because any FICO score over 720 is generally considered great, people with a 720 Consumer score think they will qualify for the best interest rates.

And then reality sets in. Half of them have scores below 720. In today’s market, a lot of them won’t even qualify for a loan. And all of them would pay higher interest rates.

So why does even sell a consumer score? They want to make money. Forced by the government to provide a free annual credit report, they sell junk instead of providing an accurate score.

To be fair, isn’t the only online site selling Consumer scores. The only place you can get your hands on a true FICO score is from FICO itself. All the other online sites are just scamming you of your hard-earned money.

Philip Tirone is a mortgage broker and the author of 7 Steps to a 720 Credit Score, a consumer-advocacy books that helps people quickly build their credit scores, qualify for lower interest rates, lower their personal debt, and avoid credit pitfalls, such as the free annual credit report scam job.