Free Credit Score Comes With A Catch

The saying that ‘there is no such thing as a free lunch’ is a truism all consumers should consider whenever they are offered something for free. This especially holds true with lenders like Borrowell now offering Canadians free access to their Equifax credit score.

While you can already get a free copy of your credit report through Equifax and TransUnion, you cannot access your actual credit score without paying for it. Yet Borrowell is offering Canadians the ability to view their Equifax credit score every three months, if they sign up through their website.

So what’s the catch?

Before you can access your free credit score, you have to provide fairly substantial personal information to Borrowell, including your annual income and personal financial goals. Based on this information they will send you offers for further financial products that ‘match your profile’.

In fact , their own terms of service state:

This means that Borrowell will also have access to your credit score. Up until now, Borrowell would only have the ability to view your credit score if you applied for a loan.

Again, from their own terms of service:

So if you sign up for their free credit score service, be aware that you are also agreeing to these same terms.

What’s in it for Borrowell and Equifax? Sales. By providing access to your credit score, and your financial goals (paying off credit card debt, renewing a mortgage), Borrowell can tailor debt services to you and your risk profile. For instance:

• If you have a good credit score but carry high credit card debt, you may be pitched a debt consolidation loan. Once housing data is available through another recent partnership between Teranet and Equifax, they will even be able to tell how much equity you have in your home.
• Have a poor credit score? They will likely offer you higher cost term loans to help you rebuild your credit.
• Having signed up, Equifax may also encourage you to sign up for monthly credit report monitoring, which adds up to more costs for you – just by signing up for a free teaser.

Now, I’ve got nothing against getting something for free. It’s smart to take advantage of company offers, loyalty programs, points programs and the like. But when you do – be cautious. Be aware that you are providing someone with access to your personal data. Be extra critical of any promotional offers you receive and don’t let the excitement of getting something for free today, cost you more tomorrow.

Podcast: Why I don’t like credit scores

Tune in to the podcast episode below.

Transcript

I’ve got a bit of a different show for you today. No guests. No questions back-and-forth. I just want to address one issue and this is, I guess, more of a rant than anything else. The question I want to answer today is why I don’t like free credit scores.

So let me break it down. I also don’t like credit scores themselves, and I talked about that in my book, Straight Talk On Your Money. I’m sure you’ve all read it, but I had to get the commercial in for it here. Myth number 4, give credit where credit is due, and I address this issue in the book, why I don’t like credit scores.

There are a few reasons. The first reason is I think we’re obsessed with them. I get people coming in to see me. They’ve got a massive amount of debt, and they say to me, okay, I realize that I’m going to have to do a consumer proposal or bankruptcy to deal with all this debt, but what’s that going to do to my credit score? Am I ever going to be able to borrow again?

And I’m sitting there thinking, well, isn’t the most important thing to deal with the debt you’ve got, rather than worrying about the future of being able to borrow again?Obviously, in a consumer proposal or a bankruptcy, once your debt is gone, it is very possible to rebuild your credit and borrow again. There are lots of people who go bankrupt and end up buying houses and cars and all the rest of it. That’s not my point.

My point is, we are obsessed with credit scores and we believe we’re not a good human being if we don’t have a high credit score. That’s my first problem with credit scores. We start doing things to make our credit score look better, rather than to make our financial lives better. I’ll explain more about what I mean about that in a minute.

My bigger problem with credit scores is that they are not for your benefit. They are for the benefit of the lender. Credit scores were created by banks to decide who they should lend money to and under what terms they should lend. So you all know how credit scores work. It’s a three digit number.

A perfect credit score is 900. There’s no such thing as a perfect score. A really good score would be in the 800s. An okay score would be in the 700s. Six hundred is bad, but once you get into the 400s and the 500s, then it becomes more difficult to borrow. You’re going to pay a higher interest rate.

So I understand why people want to get a high credit score. I totally get it. If I’m thinking of buying a house, I want to get the best possible mortgage interest rate because that’s going to save me a huge amount of money. Totally get it, I understand why people want a high credit score, but the point still remains. Credit scores were created by banks so they could decide what they should lend you, what interest rate, what to do.

Let me illustrate. And I talked about this in my book. There are two different people. Let’s call one of them Mary and one of them John. Mary has never had any debt in her life. She has saved money her whole life, and now she has a million dollars cash sitting in the bank.

John, on the other hand, has five different credit cards. He owes $10,000 on each one of those credit cards. Sorry. He has a credit limit of $10,000 on each of the credit cards, and he carries a balance of $2,000 on each of those cards. So he owes $10,000 on his five credit cards.

Who has the better credit score? Well, you would think, well, obviously, Mary is in much better shape. She has no debt and a million bucks in the bank. She’s obviously a superstar, right? Well, not according to the credit score calculation. Mary may not even have a credit score. She’s never had any debt. All she’s got is money, whereas, John is very crafty. He has five different credit cards, and he has a utilization of only 20 percent on each of them.

He’s borrowing $2,000 against each $10,000 limit. So the credit score algorithm rewards an appropriate level of utilization. So if you’re only carrying a balance of 20 or 30 percent that’s positive for your credit score. If you’re carrying a balance of 100 percent, well, you’re maxed out. That’s not good. If you never carry a balance, well, the banks don’t really like that because they can’t make money off you.

So how do you get a really high credit score? Well, one strategy is to have an appropriate utilization, say around 20 to 30 percent, which is why John will have a better credit score than Mary. Does that make any sense?

If you were a lender looking to lend someone money, would you feel more comfortable lending Mary money, who’s got a million bucks in the bank, or lending John money, who’s got $10,000 owing on credit cards and is paying, I don’t know, a couple of thousand dollars a year in interest? Well, I’d prefer to lend to Mary, but of course the banks like John because they know he will carry an appropriate amount and they’ll be earning money off him.

That’s why the banks like that level of utilization. So my point is, the reason I don’t like credit scores is they are designed for the benefit of the bank, not for the benefit of you, the borrower. And, in fact, they’re counter-productive for you because you’re so obsessed with them you try to do things to make your credit score higher, like carrying a balance on your credit card, which is just crazy.

Okay, so why – There are a couple of other reasons I don’t like credit scores, and again, we can – I talk about this in my book. One of them is that not all your payments are tracked. There may be some, student loans, mortgages, pay day loans, Revenue Canada debt, whatever, that does not appear on your credit report, which, once it’s paid off, would potentially increase your credit score.

It’s not there. I mean, I also have problems because different lenders will use different calculations. So you get your credit score from TransUnion, but you go into a bank that uses Equifax to generate the credit score, you may not actually know how you’re being evaluated. But regardless, a bunch of problems with credit scores. That’s not the purpose of this video. What I want to talk about today is why I don’t like free credit scores.

So what I’m talking about is agencies, companies that will give you your credit score for free. So let me be very specific about what I’m talking about here. You can get your credit report for free. You can send away to Equifax or TransUnion. In fact, TransUnion has an online portal that you can log in to, and it verifies and validates all your information. You can get your credit report instantly online for free.

With Equifax, you have to mail in, use the telephone. You’ve got a couple of places you can actually go in to get it. Either way it’s free, and the law in Ontario says you’re allowed to get a free credit report every year. So you can fill out the form, mail it in. they send it to you for free. You’ve got your credit report. And, in fact, in my experience, if you mail in and ask for it twice a year, they’re not going to say anything. They’ll send it to you, not a big deal. That’s your credit report. So that lists everybody you owe money to, and, you know, whether you’ve got any judgments against you, things like that. It does not show your credit score, which is that three digit number.

If you want to get your credit score from Equifax or TransUnion, which are the two big credit bureaus in Canada, you have to pay them for it. They will not give it to you for free. They run businesses. That’s how they make money. They sell people their credit scores. So how is it possible, then, that there are these other free credit score places that will give you your credit score for free? And I’m talking about places like Mogo, Borrowell, Credit Karma.

You can sign up, log in, verify your information and get a copy of your credit report and your credit score for free. So how is this possible? And again, I understand why people want to do it. We’re all obsessed I think our credit scores. So why would I pay Equifax 20 bucks when I can get it from Credit Karma for free? I totally get why people are doing it, but here’s the question you’ve got to ask yourself. If I want to get my credit score directly from TransUnion or Equifax, I have to pay for it. It might cost 20 bucks, or I can go on some recurring plan, or I can get it every month. If I have to pay 20 bucks, why is it that Equifax and TransUnion will give my credit score for free to these free credit score agencies? What kind of business model is that?

Well, I don’t know the answer for sure to that question, but my guess is they’re not giving it to them for free. They are charging them for it, but they are giving them a really good deal on it. So Credit Karma, for example, goes to TransUnion and says, hey, we’ve got all these customers. We’re going to be buying 10,000 credit scores from you for 10,000 different clients a month. What’s the deal? I assume TransUnion says, wow. We’ll sell them to you for a buck each, or two bucks each, or five bucks each, whatever it is, a pretty reasonable number.

So they can buy them in bulk and get a better deal. But still, that doesn’t change the fact that they are paying a couple of bucks to TransUnion to get my information, which they are then giving to me for free. How does that possibly make any business sense? What kind of business is that where you’re buying something and giving it away for free? Well, obviously, those free credit score companies must have another way of making money, and you all know the answer. You know what they’re doing. You sign up for the credit score. You have to give them all your personal information, including your email and everything else. You get your credit score, but now you’re on their mailing list. So now you’re getting emails. Hey. Congratulations. You qualify for a credit card. Here’s a loan. Here’s a mortgage application, whatever.

Now you think about it. If you were a credit card company and you were trying to get new clients, how could you go about doing that? Because it’s a pretty competitive market, lots of different credit card companies out there, lots of different banks. How could you get new clients? Well, one way would be, you know, put an ad on TV. Advertise on the Super Bowl. Pay a few million dollars and everybody will see your ad. Well, that’s a very expensive way to get new clients because you’re advertising to everybody when you only need to attract the certain people who would qualify.

You’re advertising to people who have really bad credit and you’re not going to give them a credit card. You’ve got people with lots of money in the bank. They don’t want a credit card. How can you target the exact person you want? You know what would be really helpful is if you had their credit report in front of you because, if you’re a lender and you’ve got someone’s credit report in front of you, it’s really easy to figure out what products you should be selling them. So someone’s got, nah, not very good credit. Well, maybe you’ve got some kind of credit rebuilder product, a credit card with a really high interest rate, but a low limit, not much risk. You could make lots of money on it. Maybe somebody has fantastic credit. Okay, great. You qualify for a really big mortgage, and we’ll give it to you at a low interest rate.

Having that credit information makes the lending decision very easy because you’ve got all the information, but how do you get people to send you their credit reports? Hmm. I know. Why don’t we offer them for free through these credit reporting or free credit score agencies and, as a result, we can then cherry pick and target exactly the advertising to the person we want. Well, that’s exactly what happens. If you sign up for one of these free services, you will start getting very targeted solicitations, very targeted emails that say, Hey. Congratulations. You qualify for this. You qualify for that. They will not send you something you don’t qualify for because they’ve already done all the math.

So if I’m a credit card company, this is fantastic because instead of spending $5 million on a Super Bowl ad, I can spend, I don’t know, 50 bucks to send a specific set of emails to a specific person. And if that person ends up getting my card and ends up carrying a balance of a few thousand dollars, well, over the course of the next few years, I’m going to make thousands of dollars off that person. So paying $50 or $100 to acquire a client is a no-brainer when you’re in the financial services business. So it makes perfect sense for me, the credit card company, to go to one of these free credit score places and say, Hey. Everybody you send me who meets these exact criteria, I’ll pay you 10 bucks, 50 bucks, a hundred bucks, whatever the deal is. So the credit score place, Credit Karma or whoever, can make a lot of money by buying your credit report for a couple of bucks, giving it to you for free, but then selling, in effect, access to you to a big bank or credit card company for 50 or a hundred bucks.

Now, I just made those numbers up. I have no idea what the numbers are, but obviously they wouldn’t be doing it if it wasn’t profitable. Now you’re sitting there going, okay, okay, I get it. I get it. They’re selling my information, but I don’t care. I’m getting a good deal, and frankly, I don’t have to take the deal. If they offer me some credit card that I don’t want, I can just hit delete on the email.

There’s no big deal. I mean, I’m, you know, I’m a big boy. I can, I can take it. I’d much rather have access to my free information than worry about whether I’m, you know, losing some of my privacy or not. Okay, fair comment. I mean, I kind of don’t like my information out there, but fine. But again, think about it from your point of view, not from the bank’s point of view. Think about it from your point of view. And, in fact, this happened to me last year. My bank, who I’ve been with forever, decided that the type of credit card I had, which had certain features, cash back and whatnot, they were discontinuing it. They were going to replace it with a less good card from my point of view.

So what did I do? Well, I went on the internet and started doing research on all the different credit cards that were out there, and I was able to find a credit card that was actually better for me. I buy a lot of stuff for the Hoyes Michalos business, and so, I need a certain type of card. Well, I found one that was actually a much better deal for me, better cash back, lower fees, the whole bit. So, obviously, I switched to that card. I was able to shop the entire market and come up with a card that was best for me. What would have happened if I was signed up for one of these free credit score services? All I would be getting would be offers that the bank wants to sell me. They’re not going to send me an offer for every single credit card out there. They’re only going to send me the offer for the card where they can make the most money off me. So I can decline the offer or not, but I am not being presented with all the options. But, hey, if I don’t have a lot of time to be searching around, if I’m maybe a little bit lazy, I don’t know how to go about doing the searches, maybe I end up taking a deal that I think is a good deal because it was the only deal offered to me. And I end up getting myself into something that was not a good idea for me, which brings me to what I think is the biggest problem with free credit scores.

You are the product. That’s the biggest problem with them. If someone is offering to give you something for free, that must mean that you are the product that’s being sold. And I realize that doesn’t make any sense, because I’m sitting there going, wait a minute. I’m getting my credit score from them. Obviously, that’s the product that I’m getting. Nope. You’re getting it for free. They’re giving it to you for free. So it’s pretty obvious you are the product that is being sold. Do you like that? Are you happy about that? Is that what you want? Hmm. I’m not a big fan of that.

I would prefer not to be the product that is being sold. So my problems with free credit scores, number one, I am the product. I’m being sold. All my information is now out there. There are other problems, though, too, with it. I see people all the time. In fact, I had a gentleman in yesterday who was filing a consumer proposal with me. He had downloaded his free credit report and free credit score from one of these agencies. And as I looked at it, I could see that the information on it was not completely accurate, and it was not complete. Inaccurate information, not complete, I see that all the time, and I assume that’s because when these agencies are buying the credit reports from TransUnion or Equifax, they are getting a summary version of it. It doesn’t have everything on it.

It may also be slightly out of date. It may be from a month ago, two months ago. I don’t know if they get some big data download and it’s not completely current, but I see it all the time. If you take your free credit score and free credit report and compare it to the one you got directly from Equifax or TransUnion, you would see that the Equifax or TransUnion report has more information on it, it’s more up-to-date, and tends to be more accurate.

Do you really want to be relying on something to make decisions that may not be completely accurate? I don’t like that idea. I don’t think that’s a good idea at all. The other problem is by having access to a free credit report all the time, it is much easier to obsess over your credit score. And again, I talked about this at the beginning. I think this is a big problem because it makes us do things that we would not otherwise do. So I’ve decided I want to try to get my credit score as high as possible. So now what I could do is do little tests and see what happens. So okay, I’m going to go out and apply for a credit card. Let’s see what that does to my credit score. Oh. Look at that. It made it go up by 10 points. That’s interesting. Okay. Now I’m going to apply for a credit increase, a credit limit increase on one of my credit cards. Does that make my credit score change or not? Well, I can do the test, and then check my credit score again and see if it made any difference. Okay.

Now I’m going to try carrying a balance. So I always paid my credit cards off in full every month, but now I’m going to try carrying a balance. Let’s say if I carry a balance of 500 bucks, a thousand bucks, 1,500 bucks, 2,000 bucks. I’ll keep pushing it and see at what point my credit score continues to go up, at what point it stops, at what point it goes down. So I can – It’s kind of like fine tuning an engine in a car. I can, I mean, I guess, car engines are all computer controlled now, but back in the day, you could get your, you know, screw driver in there and adjust the carburetor, and tune however you wanted. Well, it’s kind of the same with a credit score. I can try different things and see how that impacts it. So, okay, I want to finance a car in six months. I want to get my credit score as high as possible.

So I’m going to apply for a couple of different credit cards, I’m going to start carrying a balance, and I’m going to see how that increases my credit score. I’m gaming the system. Hey, great, power to the people, right? Let’s show the banks that two can play at this game. Okay. Again, I get it. But are you not worried about that fact that you are carrying balances on your credit cards and you are paying interest on those balances that you are carrying? So you’ve made your credit score go up, maybe, but you’re also paying out all this interest, which is money that you don’t have in your savings account now to use as the down payment on that car you want to buy. Have you actually done yourselves any favour? Hmm. Again, I’m not a big fan of it. So I don’t like free credit scores because you’re the product.

It makes it too easy to obsess over them. And sometimes a lot of the information just isn’t accurate or complete. So, okay, what’s my advice, then? Am I saying just never look at your credit report and don’t worry about it? No. I live in the real world. I fully understand that if I want to finance a car or buy a house, I’m going to have a good credit score or other supporting information that is going to make it favourable so I can get the best deal.

So what I would do, my advice is to focus on what is good for you, not what is good for the lender. That’s my advice. So if you want to check your credit score, okay, great. I mean, checking your credit report, I totally agree that’s something you should do, you know, a couple of times a year. My advice to people is, at the beginning of the year, get your free credit report from Equifax, and then in the summer, get it from TransUnion, and then at the end of the year, get it from Equifax again.

So every six months you’re getting a credit report from either this agency or that. And because they’re required to give you a free one every year, if you get one from each agency, you know, every six months, you’re getting a fresh report every six months.

And as I said, you can usually apply for them more often than that and it’s not a big deal. There are some banks that automatically will give you your free credit report and your free credit score as part of your banking relationship. I believe at the moment, and I’m recording this in April of 2019, so if you’re watching this at some other date, the information may be different, but I believe that at the moment Scotiabank and Royal Bank offer their customers, or certain customers, a free credit report and a free credit score. So there’s a way to get it for free without disclosing a whole lot of additional information because you’re already with the bank anyways.

Your credit report probably tells you everything you need to know. The credit score is a lot less important. What would make your credit score look bad? Well, if there’s a debt showing up on your credit report that you haven’t paid. Maybe you’ve got an old cell phone bill from a year ago that you totally forgot about. You thought you’d paid it, but it’s showing up on your credit report as unpaid. Well, a pretty simple solution, then. You call up the cell phone company. Make the payment to them. That’ll clean it up on your credit report, and your credit score is going to go up.

You don’t need to see your credit score to know that if there’s an error on your credit report, you just need to get it fixed, and that’s automatically going to make your credit score better. So advice number one, get a free copy of your credit report, correct any errors that are on that, and that’s going to have a big impact on your credit score. My second piece of advice would be only get your credit report or your credit score if you actually need it. So, okay, I’m planning to buy a house in three months, six months, whatever it is. It’s a big purchase. So I was really like to know what my credit score is. Okay, fine. If your bank doesn’t offer it for free, then, okay, pay the 20 bucks and get a copy of it so that at least you know what’s showing up at that particular credit reporting agency.

Now I know you could just sign up for the free service and get it forever for free, but you then put yourself at risk of getting all these solicitations, and, you know, your email box is clogged up and you’ve now given your private information around to everyone. So if you really, really want to see it, fine. Pay it. You don’t need to be doing it every two weeks, though. Get it. See what’s on it. Correct it.

So I would get my credit report first, correct any obvious errors, and then once they’re corrected, then I would pay for my credit score if I really wanted to see it. In my case, I don’t care if my credit report looks good. I assume my credit score will be good, but then if you really are obsessed with it and want to know, well, get it once and then you’re at least not looking at it all the time, which brings me to my final piece of advice, and that is don’t obsess over your credit score. Having a good credit score does not make you a good human being. That’s not how life works. Do what’s right for you, not the lender.

So, save money. Get out of debt. Those would be the top two things, and I guess it’s in the reverse order. Get out of debt and save money. Those are the top two things. So if you came to me and said, oh, I’d like to make my credit score as high as possible, I would say that’s the wrong objective. I think your objective should be, I want to be as sound financially as I can. Some day, I want to be rich. Okay. Here’s my advice. Get out of debt. Do whatever you can to pay down debt.

There’s no sense in paying out interest if you don’t have to. And I realize that’s easier said than done, but in a lot of cases it means okay, maybe I do have to file a consumer proposal. Maybe I do have to go bankrupt. Because there’s no way I can ever pay back that debt. And yes, it’s true. That will cause a hit to your credit score. There will be a note on your credit report that says you filed a bankruptcy or proposal, but you’ve eliminated all your debt.

So now you can start saving, start rebuilding. So in the future your credit score will actually be higher, ultimately, than what it is today. So deal with your debt, and then once the debt is gone, start saving money. So think of it this way. I want to go to the car dealer, and I want to buy a car. I want to finance it. So I walk in there and I say here’s the car I want to buy. And so, they punch it into the computer and go, oh, your credit score, it’s not that great.

You know, you don’t have a whole lot of credit. You don’t – You pay your balances in full every month. So the bank hasn’t juiced up your credit score. Okay, but guess what Mr. Car Dealer person? I have here $5,000 as my down payment, and look, I’ve got a job. I’ve got a good income. I’m a pretty good risk. I’m pretty sure you’re going to be able to get the car, regardless of whether your credit score is here or here because you’ve got a down payment. You’ve got an income. That is more important than whether you’re carrying balances on three or four credit cards.

So do what’s right for you. Don’t be focused on doing what’s right for the lender. That’s my advice, simple as that. Again, if you want to get your free credit score, no problem, but just understand the information is not always completely accurate. It’s not always complete. It’s not the exact credit score that the lender you’re dealing with might be looking at anyways.

So you’re putting your personal information out there, and unless you’re super highly disciplined and you can say no to whatever offers come your way, you run the risk of doing things that are actually counter-productive. Look out for you, not the bank. That’s my advice. I hope that helps. Thanks for watching and listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

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