     frank hardy (Esajh) | Friday, December 29, 2000 - 09:31 am 
I copied this from VRG. I'm sorry but I did not copy the URL however, you can link there from Bayhouse.
Frank
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Once-secret credit scores going
public
By Holden Lewis • Bankrate.com
Credit bureaus are preparing to remove the
secrecy over credit scores, the three-digit
numbers that help lenders decide whether
to lend money and at what interest rate.
As a result, you'll be able to shop smarter
for loans.
In some cases, you might find out that
taking a simple step could boost your credit
score enough to make an immediate
difference in the loan rates you're offered.
"It's a major step forward," says Edmund
Mierzwinski, consumer program director for
the U.S. Public Interest Research Group.
"Giving consumers more information will
help to balance the scales."
The change will immediately benefit loan
applicants who have better credit than they
realize, and people pay who pay their
debts on time, but who are unknowingly
penalized for borrowing from the wrong
lenders.
The nation's big three credit bureaus --
Equifax, Experian and Trans Union --
compile your credit history and sell it to
lenders, landlords and prospective
employers.
Using a secret formula that's as zealously
guarded as the recipe for Coca-Cola, credit
bureaus boil your credit history down to a
number. The number -- called a credit score
-- is usually somewhere between 300 and
900. The higher your score, the more likely
you are to repay a debt as agreed.
How credit scores are used
Lenders use the scores to decide whether
to lend money and on what terms.
For example, a mortgage broker might turn
down anyone with a score below 550. It
might loan money at a high interest rate for
people scoring between 551 and 600, at a
lower interest rate for people scoring
between 601 and 640, and at the best
interest rate for people scoring higher.
You can see why it would be handy to know
your credit score. But for years the credit
bureaus kept the scores secret. They
forbade lenders from revealing the scores
to loan applicants. Most lenders didn't mind
-- it wasn't in their interest for consumers
to know their credit scores.
Then California stepped in with a law
requiring credit bureaus to give out the
scores to state residents applying for credit
by July 1, 2001. And members of the U.S.
Congress started talking about mandating
a similar law nationwide. At least two credit
bureaus -- Equifax and Trans Union -- are
expected to provide credit scores to
consumers beginning in the first half of
2001.
"Confused and misled"
A company called Fair, Isaac and Co.
provides the credit score-generating
formula to the credit bureaus. People in the
industry often call the numbers FICO
scores, after Fair, Isaac's company name.
For years, Fair, Isaac contended that
consumers would just be confused and
misled if they saw their credit scores
without a detailed explanation of how the
scores were calculated.
You might think that the solution would be
to provide consumers with their scores and
explanations. But Fair, Isaac didn't want to
explain how it calculated credit scores, for
two reasons.
First, explaining scores might open the door
to Fair, Isaac's competitors.
Second, consumers might be able to use
the information to manipulate their scores.
To which one lender replied: Yeah. So
what? For a brief time last spring, online
lender E-Loan allowed consumers to see
their credit scores. When Fair, Isaac
complained, Equifax stopped supplying
E-Loan with credit reports. E-Loan relented,
but at the same time the online lender
lobbied Congress to require credit bureaus
to release the scores to consumers.
"It's the consumer's data, and finally we're
seeing a break of this antiquated viewpoint
that it's OK to keep customers in the dark,"
says Chris Larsen, CEO of E-Loan.
"Information improves markets."
Larsen believes that the availability of
credit scores will bring a revolution because
consumers will manage debt in the same
objective way that asset managers oversee
investments.
"We see our business as being the
unbiased advisers to consumers -- how to
manage their overall debt portfolio," Larsen
says. "You can do debt management only if
consumers have access to all the data that
allows them to say, 'I need to improve my
credit-worthiness.' Without credit scores,
you can't get out of the starting gate."
Explanation of the "reasons"
When a credit bureau calculates your score,
it is accompanied by "reason codes" that
explain, essentially, why your score isn't
higher. The California law requires credit
bureaus to tell consumers the top four
reason codes.
"You can have a credit report where the
ordinary person who looks at it can't tell
what's wrong with it," says Gail Hillebrand,
senior attorney for Consumers Union in
California. Reason codes will explain that
you are being penalized because you are
borrowing from a finance company rather
than a bank, or because you have too few
credit cards or too many credit cards or you
have too many accounts with balances or
too many accounts without balances.
You can even be penalized for paying for
your car with cash, Hillebrand says. In that
case, you'll get a reason code that says you
lack auto-loan information.
Hillebrand gives two examples of how
consumers can use reason codes and credit
scores to their benefit. She says that many
department-store charge cards are backed
by finance companies instead of banks --
and too many accounts with finance
companies can lower a consumer's score.
With this information, a borrower could
cancel a few charge cards and raise the
credit score in just a few weeks.
And she says that some borrowers --
especially residents of poor neighborhoods
-- have good credit and don't know it. With
knowledge of their credit scores, they could
apply for a low-interest loan from a bank
instead of applying for high-interest loans
from finance companies and payday
lenders.
The credit score-interest rate link
Larsen believes that lenders will be forced
by competition to reveal the link between
interest rates and credit scores. And when
consumers get that information, plus their
reason codes, they'll figure out exactly
what they need to do to raise their scores
to qualify for better rates. Maybe they
would just need to cancel a
department-store charge card, or catch up
on a late payment, to raise the credit score
enough to qualify for a better interest rate.
"The consumer needs to know, 'If I do this,
I will raise my credit score by 20 points and
that will save me a half-point on my
mortgage,'" Larsen says.
Larsen imagines the day when you'll be
able to log onto a Web site, see your credit
score, click on the score, and see how that
score was arrived at and how it could be
improved.
"It's all about trusting the consumer --
whether they'll manipulate the score to bad
effect," he says. "We think the consumer
will manage it just as they manage their
investment assets -- for maximum return."
Details being worked out
The credit bureaus are still trying to figure
out how they'll pass along credit scores to
consumers. Faced with the California law
that requires them to provide credit scores
to residents of the most populous state,
they apparently figure it would be best to
provide credit scores nationwide.
Trans Union plans to provide consumers
with its own version of a credit score, on a
different scale than the 300-to-900 FICO
score. It will be easier to understand than a
FICO score, Trans Union spokesman Clark
Walter says. When consumers buy a credit
report from Trans Union for about $8, the
credit bureau will provide consumers with
the score and an explanation, and the
credit bureau will provide a phone number
to call with further questions.
Equifax will reveal its plan this week, and
Experian did not return calls seeking
comment.
Posted December 26, 2000 |
