Four hidden costs of using credit apps

A good FICO credit score can grant you access to a wide range of opportunities, from locking in a good interest rate on a mortgage to even getting that dream job you’ve always wanted. This gives consumers the incentive to keep a close eye on their credit to make sure that it stays clean or that they are on the right track for improving their credit.

Because credit can be crucial for many reasons, credit apps, such as Credit Sesame, Credit Karma or myFICO, have become popular. These apps allow consumers to pay a subscription fee to monitor their score on demand. A September 2021 study published by Consumer Reports found that consumers like having 24/7 access to their credit information because they can track it and catch unauthorized use of their accounts.

Downsides to Credit Apps

In the same Consumer Reports study, some users raised concerns about these apps. They weren’t sure the credit scores they received were accurate. Users were also irritated about the amount of marketing, including pressure to apply for more credit instead of reducing their debt. In addition, they were concerned about the privacy of their data and whether that data could be stolen.

Here are the four most common hidden costs of credit apps:

1) It costs to get your FICO score and credit reports.

Some apps like Credit Karma, Credit Sesame or Experian offer you a credit score for no charge. This number, called the Vantage Score 3.0, is a cumulative average of your credit score. The problem is that lenders normally go by standards set by FICO scores, not by the Vantage Score 3.0. Therefore, this data is not reliable to determine if you would be eligible to receive, for example, a car or home loan. Furthermore, to access your FICO score on ANY of the credit apps, you are going to pay at least $19.99 per month, as noted in the Consumer Reports article. To avoid paying this fee, you can get your score for free from your bank instead (when you apply for a loan or mortgage).

Also, when using the apps, you pay a fee to get copies of your credit report from one or more of the credit reporting bureaus (Experian, Equifax and TransUnion). However, you can already easily access your credit report for free by going to Annualcreditreport.com. You can request your free report from all three bureaus once a week.

2) You’re giving away more information than you think.

With today’s technology, it’s easy to sign up for something and go about our business without thinking twice about it. Signing up for credit apps is no different, but when we click “we accept the terms,” most of us do not read the fine print for those terms. Consumer Reports offers some examples of what happens when we sign up:

• Credit Karma’s policy states it can gather information about you from social media posts, as well as employment/income data and vehicle or driver records from third parties.
• myFICO’s agreement says it could dip into census data or real estate records when putting together its file on you.
• TransUnion’s privacy policy states that it might collect your family members’ names, as well as your home and billing addresses, email addresses, phone number, Social Security number, passport number, birth date, employment information and driver’s license number.

They collect this information to send you offers for additional products, thus helping them make money. These offers could be products from a third party, an attractive proposal to upgrade your membership with them or even get a credit card or loan. This brings us to our next major cost.

3) It can lead to hard credit inquiry.

While an occasional hard credit pull won’t hurt, several at one time will. Signing up for some of the apps’ offers (mainly credit cards and loans) sets you up for hard credit pulls, which will negatively impact your score. When it comes to deals like this, it is always best to check the source (such as the lender/banking institution behind the offer) before taking it. Avoid any online loans or products that are NOT insured by the FDIC, and ALWAYS do your research. If something appears too good to be true, it probably is. Not to mention, if you weren’t planning on taking out a new loan or opening a new credit card, that can lead to debt, which may come with an additional monthly payment.

4) You forfeit your rights to sue.

Yes, you read that right. According to Consumer Reports, included in the terms of credit apps is a clause that you agree not to sue them over any disputes but rather address issues through arbitration. When it comes to arbitration, it is an uneven playing field between you, the consumer, and the company; the company usually has greater power.

As mentioned by Consumer Reports, credit bureaus are subject to the Fair Credit Reporting Act, which gives consumers the right to challenge the bureaus in court if they violate that law by improperly handling credit information. By agreeing to arbitration with credit apps, consumers forfeit that right.          

LSS Financial Counseling is here to assist you! Our certified, trusted financial counselors can help you understand your credit score, walk you through accessing your free credit report, and create a plan with you to build and improve your credit or reach other financial goals. You can make a free and confidential appointment by calling 888.577.2227, or get your support online.

Ray McCoy is a Certified Financial Counselor with LSS Financial Counseling.