Free Credit Scores

If you're thinking about borrowing money, then it's time to consider getting your hands on a copy of your credit report, as well as your credit score. This is especially true if you've borrowed money before, and your repayment pattern has been less than timely. It's been relatively easy to obtain a copy of your credit report, but now there are companies offering free credit scores too.

The time has finally come to answer the long-standing question - is it possible to obtain a free credit report? Fortunately, the answer to that question is quite simple - yes. In this publication, we're going to walk you through our experience with three companies claiming to offer free credit scores. As part of that discussion, we'll first explain the difference between a credit score and a credit report. Then we'll explain how you can get your free score, the application process you need to go through, and the information you can obtain along with your score. Finally, we'll talk about offers of free scores that come with a hitch.

Credit Scores and Credit Reports

Additional Resources

When it comes to consumer credit, there are three credit bureaus that nearly all lenders use - TransUnion, Experian, and Equifax. Each of these credit reporting agencies provide lenders with services that include:

Risk Management - using proprietary models, identifying for creditors those individuals that present a repayment of debt risk.
Credit Reporting - supplying historical reports detailing a potential borrower's total debt load, mix of credit, as well as payment patterns.
Credit Scoring - publishing simple numeric scores, allowing lenders to quickly measure the creditworthiness of someone seeking credit.

The differences between these last two services are important to understand. It's been well publicized that individuals are entitled to free credit reports. In fact, it's possible to obtain a free report from each of the three credit bureaus once a year.

Unfortunately, free credit reports are often mistaken for free credit scores. Credit reports contain information that is subsequently used in developing a score. Therefore, obtaining a credit report is useful to consumers wishing to understand the basis for their scores, as well as providing the opportunity to correct errors on their report.

Credit scores allow lenders to quickly assess the creditworthiness of a loan applicant. The higher the score, the lower is the risk of default for a potential borrower. Applicants with higher scores may be able to obtain more favorable loan terms (lower interest rates). So while understanding the information contained on a credit report is important, it's valuable to understand if that information translates into a high credit score. If not, then the borrower may be motivated to take action to improve their score.

Calculating Credit Scores

While all three credit bureaus may use proprietary calculations to develop a person's credit score, generally the weights are based on the FICO approach which consists of:

Payment History (35% of credit score) - Late payment patterns and bankruptcies can hurt your payment history score, while on-time payments help your score.
Outstanding Debt (30% of credit score) - The total of all money owed to creditors, as well as the amount of credit used versus the total credit available to you.
Overall Credit History (15% of credit score) - The number of years that you've been borrowing money from lenders, or revolving credit accounts with card companies.
New Credit (10% of credit score) - The more frequently you apply for credit, the lower your score. While it's important to build credit history, aggressively seeking new lines of credit will lower a score.
Other Factors (10% of credit score) - The mix of credit and loans the borrower has used in the past and present.

Later on we'll see how one of the companies offering free credit scores uses the above information to help consumers understand the action they can take to improve their score.

Companies Offering Free Credit Scores

This research was conducted in January of 2010, and while the process may evolve over time, the lessons learned here can be extended to new processes. The companies we found that claimed to offer free scores included Quizzle.com, CreditKarma.com and Credit.com.

Quizzle.com

The process begins by filling out your name, email address, and zip code. You're then sent an email that contains a link used to help verify your identity. Step 2 of the process includes supplying your date of birth, the date you purchased your home (if you own one), as well as the purchase price of the home.

You're also asked to complete information about savings you might have in the bank, the time you intend on staying in your home, annual household income, and the type of mortgage you might have outstanding. All information must be supplied to move to the next step in the process.

You're then presented with a screen containing information that needs to be completed in five minutes or less. Your response to the questions appearing on the screen is used to verify your identity. Information typically includes bank accounts, prior addresses, and previous loans.

Once your identity has been verified, you're presented with your credit score (obtained from Experian) as well as grades for your Credit, Budget, Home Value, Mortgage, and a Rainy Day Fund (money you have saved). The grades you get in each area are calculated based on information in your credit report, as well as the responses to earlier questions. Quizzle also provides a link to your credit report.

CreditKarma.com

The first step at Credit Karma is to create an account by supplying your name and email address. Once again, you'll receive an email that will continue the process of identity verification. In the second step of this process, you will need to supply your address, a telephone number (only used to pull the credit score), date of birth, and Social Security Number.

Once completed, Credit Karma will provide you with your free credit score. In this case, the score is provided by TransUnion. You'll then be presented with several interesting bits of information including how your score ranks when compared to a national distribution of credit scores. Based on your score, you'll also get a qualitative feel for how creditors would rate your creditworthiness on a scale that ranges from Very Poor to Very Good. Your score will be compared to Credit Karma's community, the state in which you reside, as well as your age. You'll also be presented with a series of offers from lenders based on your score.

Credit.com

As was the case with the previous two offers, Credit.com requires you to create an account. This time you need to supply your name, address, Social Security Number, Annual Salary, and a Financial Goal. Once again, you will be sent an email to begin the identity verification process. This second step involves answering a series of questions identifying your mortgage lender, employer, address, prior residences, and revolving credit lenders.

As was the case with Credit Karma, Credit.com pulls your credit report from TransUnion. Unlike the prior two services, this site does not provide you with a score. Instead they provide a rating on a scale that ranges from Bad to Excellent.

The information you're presented with is organized by the FICO approach mentioned earlier (Payment History, Debt Usage, Credit Age, Account Mix, and Inquiries). In each of these categories, you're supplied a grade as well as a brief recommendation aimed at helping to boost your grade.

Unfortunately, the only way to get your actual score is to sign up for a free credit monitoring service trial offer. Once the 30-day trial is over, you'll be charged around $15 per month for the monitoring service.

Not-So-Free Credit Scores

This last example is something many of us are used to nowadays. It's an offer of something for "free" that comes with a potentially high price tag. While it is possible to find a website offering truly free credit scores, you're also going to run into a lot of websites that offer free scores if you're willing to sign up for a service using your credit card.

Free credit scores will likely be bundled with credit monitoring or identity theft services, since the three services are very much related. Marketers can afford to offer free scores because they know many consumers will fail to cancel their membership after the 30 day trial is over. After three months, it has cost you $45 for your "free" credit score.

The offers by Credit Karma and Quizzle are a bit more subtle. By asking for financial data as part of the identification and verification process, they can better target offers from lenders and other creditors to qualified individuals.

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