Credit bureaus are normally thought of as the record keepers of your financial information and the sources of your credit report. However, they also create credit scores and sell services — and sometimes they go too far in their practices. That's the recent conclusion of the Consumer Financial Protection Bureau (CFPB), which took punitive action against Equifax and TransUnion, two of the three major credit bureaus. (The CFPB has not taken any current action against Experian, the third major credit bureau.)
In the settlement with the CFPB, the two bureaus agreed to pay $5.5 million in total fines to the CFPB and $17.6 million in restitution to affected consumers. The bureaus were cited for two primary concerns: deceiving consumers with respect to the value of the credit scores that they sold and tricking them into enrolling into subscription-based programs. In announcing the CFPB action, CFPB Director Richard Cordray said, "Credit scores are central to a consumer's financial life and people deserve honest and accurate information about them."
Many people do not realize that there are many different credit scores, and not all scores are FICO scores (named for the Fair Isaac Corporation that developed the original scoring system) that are typically used by creditors for lending decisions. Further, not all FICO scores are the same, as there are several versions of the FICO scoring system used by creditors, and the information used to calculate them may not be the same between all lenders.
In the services that they sell to consumers, TransUnion and Equifax use non-FICO scoring systems: TransUnion uses the VantageScore system and Equifax uses their own proprietary model (the Equifax credit score). There is nothing wrong with using these systems as frames of reference, but the CFPB concluded that both agencies falsely represented their scores to consumers as being the same scores that lenders use for credit decisions.
Both bureaus also offered some credit service products under a subscription model with a free or nearly free trial period. Unless consumers cancelled during the trial period, they were enrolled automatically in the program and assessed recurring fees — known as a negative option because consumers must opt out of the service, not opt into it. According to the CFPB, this aspect was not "clearly and conspicuously disclosed" to consumers.
As part of the settlement, both agencies agree to inform consumers clearly about the nature of the credit scores that they sell, obtain the consent of consumers before enrolling them in any product structured as an opt-out (negative option), provide easier ways for consumers to cancel their products and services, and stop billing upon cancellation.
How can you avoid being taken advantage of by credit bureaus? In the same way that you avoid being taken advantage of by almost any organization — when you purchase something, read the fine print. Understand the purpose and value of what you are purchasing, and understand the payment terms and conditions of use.
Credit scores created by the bureaus can still be a useful reference as a baseline to monitor changes in your credit, but they do not necessarily translate to the score that a lender will use. Don't take the score from a credit bureau as an absolute, or decide that once you hit a certain value that your credit score is "good enough" for all purposes. Regardless of whether or not you are applying for new credit, check your credit score periodically using Credit Manager by MoneyTips.
Investigate in detail anything that is listed as free or available for an extremely low cost. Anything that is truly free is free for a reason. Make sure that you check for automatic renewals or fees that kick in over time (or under certain conditions).
The credit bureaus perform a useful function, but they have limitations. Know why you're using them, and if you decide to purchase a product from them, make sure that you are receiving proper value for your money — just as you would with any vendor.
You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.