It wasn't a happy new year for TransUnion and Experian, as these two credit reporting agencies entered into a settlement with the Consumer Financial Protection Bureau (CFPB) for deceptive information about and marketing of credit scores and credit-related products. The two companies agreed to pay a total of over $17.6 million in restitution to customers, and they'll also pay the CFPB $5.5 million in fines.
The case revolves around the credit score and credit reporting products that these two companies sell directly to consumers. In order to be lent money--or even lent theoretical money in the form of an available balance on a credit card--you have to prove that you're a responsible borrower and will pay back the loan. A credit score helps determine your likelihood of doing just that.
Credit reporting agencies provide credit reports and scores to businesses, and they also have a wide variety of credit report-based products that they sell or provide to consumers. This includes the free annual credit report you're entitled to order once a year. Some agencies and credit card companies and issuers also offer free credit scores.
To determine credit score, credit reporting agencies collect a bunch of information on you including who you owe money to, your payment history and how much available credit you have. They turn this into a three-digit number ranging from 300 to 850. The higher your number is, the better a credit risk you are to lenders.
However, no two credit scores are alike. It's not just that your credit score with one agency can vary greatly throughout the year, depending on what's happening in your financial life, but no two credit reporting agencies use the same models in determining their credit scores.
Because of this, businesses that use credit scores to determine whether or not to extend credit don't just rely on one company's credit score. They get several and do their own analysis to make the final decision on lending.
However, the wrinkle in this case is that there are other credit scoring models that are used to generate scores that get marketed to consumers. TransUnion uses a third-party company's model called VantageScores, and Equifax has its own proprietary model. While the credit reporting agencies also try to sell these scores to lending and commercial users, these consumer-targeted scores aren't the credit scores that are usually used in the actual lending decision. It's just an "educational" tool. This means that if you bought one of these scores to help you understand what kind of mortgage you could take out, this number wouldn't be completely reliable in helping you know what terms you could expect.
"TransUnion and Equifax deceived consumers about the usefulness of the credit scores they marketed, and lured consumers into expensive recurring payments with false promises," said CFPB director Richard Cordray in a statement. "Credit scores are central to a consumer's financial life and people deserve honest and accurate information about them."
In addition to marketing credit scores that weren't valuable, the CFPB says that the two companies also tricked consumers into signing up for subscription programs with monthly charges and not clearly stating the billing terms.
In the terms of the settlement, TransUnion will provide over $13.9 million and Equifax will pay about $3.8 million in restitution to consumers who were affected by these practices. Affected customers will receive letters of notification about these payments. Additionally, the companies have to change their practices in order to give customers accurate information about the quality of their credit scores; they have to be clearer in their subscription service enrollments; and they have to make it easy for customers to cancel these products. TransUnion will also pay a $3 million fine to the CFPB's civil penalty fund, while Equifax's fine is $2.5 million.
Experian, the third major credit agency in the country, was not implicated in this case.
