Credit Scores as Important as Ever but Harder to Get
It was great while it lasted.
For a few wonderful weeks, consumers were able to see their own credit scores, the three-digit numbers upon which much of our financial lives now depend.
Internet broker E-Loan at https://www.eloan.com defied the credit-scoring companies by offering consumers a free glimpse of their own numbers. I used the service shortly after it was launched Feb. 22 and found it fast, helpful and surprisingly comprehensive.
The site explained that FICO scores compiled by leading scorer Fair, Isaac & Co. range from 300 to 900, although most people fall between 600 to 800. The site also included a sample chart, showing that a typical mortgage lender would consider a score of 719 or higher to be excellent credit. A score of 680 to 719 would typically be considered good credit, and 620 to 679 would likely prompt a closer look at your file before a lending decision was made. Scores below 620 usually would be considered higher risk, with anything below 585 probably off limits to most lenders. (So-called sub-prime mortgage lenders specialize in making loans to people with scores too low for the “prime” lenders; fees and interest rates are typically higher.)
My score was well over 700, although it was a bit lower than it had been two years ago, when a mortgage broker shared the number with me. Exactly what goes into creating the score is a jealously guarded trade secret, but the accompanying information on the E-Loan site explained some of the factors that can affect a score. Not surprisingly, late payments, liens and bankruptcies can lower your score a lot, but just applying for credit seems to nick your number a bit, because lenders are always wary of people who may run up new accounts right before going bankrupt.
The site’s explanations helped me understand that the lower score was probably due to the two credit cards I’d applied for recently and an unfortunate lapse with a couple of library books during our move to Los Angeles. (Who knew the Orange County library was using a collections service these days?) The site also encouraged me to get a copy of my credit report so that I could review and challenge any inaccurate information.
The site was frankly far more comprehensive in helping me understand credit scoring than my amiable broker, whose only comment about my previous score was, “Wow! That’s great!”
That’s why it’s a bit ironic to hear one of Fair Isaac’s reasons for pressuring E-Loan into dropping the service, which the broker finally did April 7.
Fair Isaac argues that it has no objection to consumers learning their number--but only from a lender. Fair Isaac, which says its FICO scores are used to evaluate 75% of U.S.mortgage applications, enforced clauses in its contracts with major credit bureaus to prevent E-Loan from sharing the scores just because consumers asked for them.
Lenders use scores in different ways and in conjunction with other information including credit reports and consumers’ credit applications, said Fair Isaac spokesman Craig Watts. Credit scores can change by the hour, so putting too much emphasis on any particular number is misleading, he said.
“Any disclosure of the credit score should take place in the context of a lending decision, so that the lender can put the credit score into the context of the consumer’s specific situation,” Watts said.
E-Loan touted the service as a necessary democratization of the lending business; E-Loan executives say that not allowing consumers to see their scores is akin to not letting college applicants see their SAT scores.
“People are flying blind and that’s unacceptable,” said Chris Larsen, E-Loan’s co-founder and chief executive. “People need to know this to manage their finances.”
Credit scores help determine not only whether you can get a loan or credit card, but also how much it will cost. Landlords may use the number to decide whether to rent you an apartment, and some insurers employ it to decide whether you’re a good risk.
Overall, credit scoring has probably been a boon for consumers. Today, virtually anyone can get credit, at a price. Credit scoring seems to help lenders better judge their risks and price credit more fairly, boosting the cost for more-risky borrowers while allowing those with sterling scores to pay less.
Credit scorers argue forcefully, and usually convincingly, that their mathematical formulas help erase human prejudice from the lending equation, helping more women, minorities and low-income people get access to credit.
Fair Isaac is understandably concerned that revealing too much of how credit scores are compiled will jinx the whole system. But it may already be too late.
Every social scientist knows that people begin behaving differently once they realize they’re being observed, and artificially “good” credit behavior--starting to pay bills on time just before applying for a loan, then lapsing back into late payments afterward--could make the scores useless to lenders because they would no longer be predictive.
It’s probable that some people will try to “game” the system. Most people’s need for credit, however, is ongoing; few people get just one mortgage, car loan or credit card in a lifetime. Once they know how important certain behaviors are to good credit, they may be just as likely to maintain those behaviors as to abandon them.
Even raising awareness of the fact that there are such things as credit scores increases people’s interest in learning theirs--and learning how to improve them.
Unfortunately, a lack of information can be destructive too. I’ve received e-mails from consumers proud of the fact that they closed several credit card accounts at once, thinking that shutting off all those credit lines would help their score. Actually, such actions often hurt, especially if consumers carry a balance on any card. Lenders like to see lots of room between a customer’s total credit limit and the amount they use. Closing accounts lowers the total credit limit available, making any balance loom larger.
Fair Isaac has already been forced by rising consumer interest to give us some glimpses into what goes into the score. The above information about credit limits and balances is on the company’s Web site at https://www.fairisaac.com. Look for the wee “consumer info” label at the bottom of the page. The site includes other general tips, such as the importance of making payments on time and of applying for credit sparingly.
Given how important credit scores have become to consumers’ finances, it’s past time to give them the information they need to manage their credit wisely. The credit bureaus have begun to do their part by making credit reports more understandable. Giving access to credit scores could be another step forward.
State Senate Bill 1607, sponsored by Sen. Liz Figueroa (D-Fremont), would prevent the kind of contract clauses that allowed Fair Isaac to pressure Equifax and Trans Union into cutting off E-Loan’s credit score service. For more information, visit https://www.sen.ca.gov.
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Liz Pulliam Weston can be reached at liz.pulliam@latimes.com. She writes a question-and-answer “Money Talk” column on Sunday.
