Have you ever wondered why getting your credit score costs money? You can get a free consumer report once a year from each of the bureaus. They should give you a free credit score also, right?
Your credit score is derived from information found in your free consumer report. Providing the equation result with the report is not difficult. So why do these companies charge money? There are four primary reasons why getting your credit score costs money – for now:
- There are royalty arrangements
- Risk equations generate revenues
- Consumers are willing to pay
- Free options are emerging
Credit Scores Cost Money Because of Royalties
The first reason why getting credit scores cost money is the royalty arrangements built into the industry. Most people are familiar with the big three consumer reporting agencies (Equifax, Experian, TransUnion), and the biggest modeling company Fair Issac which develops and markets the FICO equation.
These four companies cooperate and compete simultaneously to provide lenders with decision-making data and analysis. By first understanding where they compete, and then where they cooperate, we can better understand the first reason why getting a credit score costs money.
Fair Issac cooperates with each of the three consumer reporting agencies to deliver its flagship product: the FICO Risk Score. The FICO equation is based upon data contained in consumer reports and relies on the underlying data. When a consumer-reporting agency calculates and provides a FICO result to a bank or consumer, the agency must pay a royalty to Fair Issac.
Likewise, when Fair Issac provides a FICO result directly to a consumer it must use one of the three consumer report files to calculate the equation. Fair Issac pays a royalty to the bureau supplying the result.
These royalty charges are passed along to the consumer making the request.
The big three consumer reporting companies compete fiercely for their share of business. Price is often a determining factor in which consumer reporting agency is most commonly used. When lenders rely on FICO, they have three places to get the results. This leads to price erosion of consumer reports for the bureaus. Meanwhile, Fair Issac royalty margins remained untouched.
Rather than watch prices plummet on consumer reports while Fair Issac got rich on royalty payments, the three consumer reporting agencies cooperated in a joint venture. They created Vantage to provide an alternative. The Vantage equation emulates FICO’s main value proposition: it means the same thing across all three consumer reporting agencies.
The key differentiator is royalty payments when banks and consumers request credit scores. Vantage cuts Fair Issac out of the business deal. Consumer-reporting bureaus can now provide equation results without making royalty payments. See more on this below.
Credit Scores Generate Revenues
When I left the industry consumer outrage about reporting errors and the mysterious black box of credit scores was an annoyance. The industry simply wanted to conduct its business that way it always had. However, consumer advocates and suits from states attorneys general and new legislation made that impossible. There was heightened consumer awareness about consumer reporting, and it was not going away anytime soon.
Lemons into Lemonade
The industry had reached a lull. Banks and lenders were consolidating and the traditional consumer reporting business was starting to contract after years of growth. Then the industry discovered how to turn the lemons of consumer fear and outrage into lemonade: sell monitoring services for a monthly fee. It represented a brand new way for consumer reporting bureaus to make money.
As consumers became more educated about how consumer reports worked, they naturally became more curious about their risk equations as well. Charging money to get a credit score became yet another revenue growth opportunity.
Consumers are willing to pay
The third reason why getting credit scores cost money is that consumers are willing to pay. Lenders use credit scores to measure the likelihood of consumers being late on future debt obligations. Lenders base approval and interest rate pricing for loans on these equations.
A modest change in your generic risk equation can translate into significant interest rate savings on a loan. For example, a 1% change in a thirty-year $100,000 mortgage means paying an additional $20,000 in interest payments over the life of a loan. Lower interest rates can have a huge impact on a consumer’s bottom line.
Paying a nominal fee to get your risk rating result can save thousands of dollars down the road. It makes sense, and there are plenty of consumers concerned enough to pay for the insight.
Free Score Options Emerging
Every business opportunity has a life cycle. At some point in every growth industry, new competitors enter and change the equation. The business of charging consumers money to get their credit score has been lucrative for the consumer bureaus and modeling companies. However, the growth of Vantage and the emergence of new models for educating consumers are eating away at this revenue stream. Here is a quick recap of some of the options.
- Freecreditscore.com offers a Vantage result from Experian at no cost provided you cancel your trial membership in time.
- Creditkarma.com offers a free Vantage score from TransUnion. The site is funded through advertising so there is truly no charge to see this single result.
- Credit card statements may soon include free FICO scores. Several lenders are testing out the online delivery of results to cardholders as incentives to enroll and/or use online statements.
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