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Credit Score Law, Information
By Broderick Perkins Californians have the right to see their credit scores, a secret and questionable number lenders heavily rely upon to decide what you'll pay for a loan, if you'll be approved for a loan or if you'll be declined. California Governor Gray Davis, on Sept. 30 signed SB 1607, creating the nation's first credit-scoring law to give consumers access to their credit scores. Feeling consumer pressure, at least one credit reporting agency began releasing credit scores to anyone before California's law took effect July 1, 2001. Originally introduced as a lender's risk management product that's also used to speed up the lending process, credit scores represent a statistical evaluation of how likely you are to default on a loan. Scores range from 300 to 800 or more and the higher the score, the lower the probability you'll default on a loan -- in theory. Consumer advocates argued that you have a right to your score because it represents telling personal credit data that don't always add up. Old, new law Previously you couldn't get your credit score, except under the table from some brokers and lenders who ignored attempts to keep them secret. Now, California lenders must hand over your credit score when you apply for a mortgage, but not other loans. While the new state law doesn't force lenders to turn over your credit score for non-mortgage loans, it does permit you to obtain your credit score just as you have a right to your credit report, for a small fee, at any time, direct from each of the three national credit bureaus, Equifax, Experian and TransUnion. Lenders won't be obliged to explain your credit score, but the credit bureaus will have to provide a detailed explanation about the data it used to arrive at your score. "Consumers deserve to know how lenders are evaluating their loan applications," said Gail Hillebrand, staff attorney for Consumer's Union. Previously, when any loan application was rejected, you had a right to see your credit report at no cost, but credit scoring was a closely held secret shared largely by lenders and San Rafael-based Fair, Isaac and Co., which created the most widely used credit-scoring system.
Fair, Issac once argued the scores ccould do more harm than good if they were released without the context of an actual loan application. Rather than requesting credit bureaus to explain the scores, that should be left to lenders' because they provide the context, the company said. "The scores represent credit behavior. If you are aware someone is watching your behavior you might change your normal habits to reflect what you think they want to see," said Craig Watts, a Fair, Isaac spokesman, before they also decided to release credit scores. That results in "gaming" a temporary adjustment to change the lender's decision, not to change actual credit habits. "People who have tried that are more likely to hurt their score than help it," said Watts. Credit score game For example, let's say you've never missed a mortgage payment, you've never been late on your credit cards and are generally considered a no-risk, A-1 credit consumer. To make your loan application bullet-proof, you decide to improve your credit score by paying off some small balances on high-limit credit cards. You cancel those cards and shift the balance, thousands of dollars, onto fewer cards in an effort to show meaningful consolidation. Your application is denied. Suddenly canceling many cards with small balances and then shifting all the debt to fewer cards effectively raises the ratio of your unpaid balances to the maximum credit lines available on fewer cards. To the bloodless credit-scoring software, it appears as if your financial situation has tightened. The real estate industry, Consumers Union (publisher of Consumer Reports) and other bill supporters disagreed. They said consumers always had the right to know the score because when you apply for a mortgage or other loan, most lenders obtain your credit score along with your credit report. Your credit report, for better or worse, provides the basis for your credit score. Right to know "It's more than the consumers right to know. It's the consumers right to correct erroneous information on a credit report with penalties to the credit bureaus for failing to correct the error in a timely fashion," said Pam Foley, president of E. F. Foley & Co., Inc. a mortgage brokerage in San Jose. Supporters of the new law said while credit scores consider other ability-to-pay information, including your income and time on the job, they rely too heavily on credit report information without accounting for nuances in credit behavior. Your credit report may appear pristine, but you could have to pay a higher interest rate or, worse, you could be denied a loan when you score low for not having enough credit, for paying off loans too quickly or for carrying certain credit cards -- even if your credit report appears pristine. "If someone has a department store credit but pays off the balance immediately, on the credit report it shows up as always paid on time with a zero balance and that's perceived as positive. But that could be one of the reasons your credit score is low. People who obtain store credit cards are more inclined to default on loans than those who don't," said a spokesman from the California Association of Realtors. • Visit DeadlineNews.Com's Consumer Credit Center
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 Consumers Don't Know The Score
By Broderick Perkins A CONSUMER with a credit score of more than 720 signing for a $150,000, 30-year, fixed-rate mortgage, will get a mortgage rate of about 5.72 percent and pay $872 a month. Consumers with credit scores below 560 will be charged a 9.29 percent rate with monthly payments of $1,238 if they can qualify for the loan. The annual difference is $4,392, according to Fair Isaac Co., the San Rafael, CA company the developed the most popular credit scoring system called FIC0. The glaring example of what a difference some credit scores can make is used to hammer home a point. When it comes to credit scores, what you don't know can hurt you, according to "Most Consumers Don't Understand Their Credit Scores" a joint-study released yesterday by consumer advocacy group Consumer Federation of American and San Francisco-based Providian Bank. The new report found that only about one-third (34 percent) of consumers fully understand credit scores. The rest could be making mistakes that lower their scores and their chances to land a mortgage or a cheaper interest rate. It gets worse. While mortgage lenders examine credit reports, they rely most heavily upon credit scores to approve or decline loan applications. Credit scores are also used to grant or refuse a host of credit and other services including jobs, insurance, rental housing and utility services.
Consumers Federation found that of 1,027 consumers surveyed by Opinion Research Corporation International.
"Credit scores are relatively complicated. It is a substantial challenge for the financial press and consumer press to provide information about this fairly complicated issue," said Stephen Brobeck during a press conference Sept. 21 to release the information. What are credit scores? Credit scores -- issued by the three major credit reporting bureaus -- Equifax, Experian and TransUnion -- are a numerical analysis of a consumers' creditworthiness -- a statistical rendering of a consumer's likelihood to default on a credit payment. The score considers payment histories, level of indebtedness, available credit levels, available credit use, types of credit, and other related data. The traditional FICO score runs from 300 to 850 -- the higher the score the more creditworthy the consumer. A new FICO "Expansion" score, available only from Fair Isaac for non-traditional credit consumers, looks at a consumer's payment habits absent credit cards, consumer loans and the like for a score ranging from 150 to 950. Unlike credit scores, credit reports -- also reported by the three major credit bureaus -- track credit consumers' payment records by individual credit account and reveal how well or how poorly each account is being paid. The reports also include credit requests, notices of liens, judgments and other "derogatory" remarks as well as remarks from the consumer, among other information. The Consumer Federation survey also found: • Forty-three percent incorrectly believed consumers have only one score. Each of the three major credit bureaus computes separate scores and they typically differ. • Only 12 percent correctly identified the low 600s as the level below which consumers are denied credit or have to pay higher rates, while only 13 percent knew that scores above the low 700s usually qualify them for the best rates. • Forty percent didn't know that paying off a large balance on a credit card will improve your credit score. • Twenty-eight percent believed incorrectly that using a credit card's full credit line will improve a score. • Seventy-two percent believed that they can obtain their credit score for free once a year. That's only true under a new law if you apply for a mortgage. "I'd be very surprised, however if in eight months when we have the results of a similar survey if we don't see progress," Brobeck said. Credit score help The survey's release coincides with the availability of CFA's new "Do You Know the Score on Credit Scores?" online educational test which helps consumers learn what they don't know about scores. Leading credit score system provider, Fair, Isaac, Co. also provides extensive credit scoring information for consumers at MyFico.com. In a nine-month roll-out beginning on the west coast on December 1 2004 and spreading to the east coast by September 1, 2005, a new federal rule -- the Fair and Accurate Credit Transactions Act (FACTA) which amends the Fair Credit Reporting Act (FCRA) -- will grant consumers one free copy of their credit report from each of the three national credit reporting agencies. There will be an additional charge for obtaining a credit score, unless you are applying for a mortgage. Credit reports are already free under certain conditions, including if the report was used to deny you credit, insurance or a job, if you are unemployed, are on welfare or think you are a victim of fraud. Also a handful of states already have access to a free annual credit report. Californians, for example have had free access to credit scores since 2001, but only when they apply for a mortgage. The Consumer Federation study was the group's second such report. Last year, it produced a study with different questions to examine consumers' knowledge of both credit scores and credit reports. "Consumers Lack Essential Knowledge, And Strongly Support New Protections, On Credit Reporting and Credit Scores" was used to provide testimony before the U.S. Senate Banking Committee at a time when the committee was hashing out amendments to the federal Fair Credit Reporting Act. Consumers Federation says the most effective steps you can take to improve your score are to pay bills on time, quickly get current after you've missed a payment, don't max-out your credit card limits, pay off debt rather than move it around, don't open or apply for new accounts rapidly and check your credit report at least once a year and especially before you apply for major credit like a mortgage. • Visit DeadlineNews.Com's Consumer Credit Center Copyright © 1999-2005 DeadlineNews.Com DeadlineNews.Com's Editorial Content Is Intellectual Property |
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