Credit Scores

The lone three national credit bureaus each sell a score based on your behavior, and they all hired the same company to figure that important three-digit number.

The FICO score grades more than just delinquency. It is also influenced by characteristics beyond performance—like the proportion of loan balances to loan amounts, the number of consumer finance accounts, and even the number of credit cards shown as open on a report. High credit scores get approvals, low rates, low down payments and light documentation. Low scores get heavy documentation, higher down payments, higher rates and denials.

Major changes in the disclosure of information about the FICO score have occurred since its appearance in 1989. The most fundamental change came in 2001, when Fair Isaac, the company that created the score, teamed with national consumer reporting agency Equifax to release its version of the number, "BEACON," to consumers. The TransUnion FICO score followed in 2002; Experian's in 2003.

Before then, you had to sneak around to get your secret scores because credit bureau contracts blocked anyone from showing consumers the FICO. Fair Isaac argued that the score validity would be affected by consumers altering their behavior in short term ways that has "nothing to do with their long term credit risk." In 2000, one company, E-Loan, dared to defy Fair Isaac and the CRAs, and freely distributed the numbers—only to have its data faucet shut off. In 1999, the author of this web site, creditscoring.com, had to ask Fair Isaac and the CRAs the silly-sounding but obvious question, "What horrible thing will happen if you release the consumer's score to him?"

Strange bedfellows

Sitting on top of all that credit payment data can give you ideas. Experian, isn't going along with the other two in Fair Isaac's myFICO.com disclosure experiment. Sign up for the fabulous service to get all three FICO scores, and you'll get them. But you'll find access to the "FICO Score Simulators" for only TransUnion and Equifax. Experian wants to sell you its PLUS Score, "a user-friendly, consumer-focused credit score" (presumably meaning as opposed to the cold, hard reality of the FICO, used by lenders).

Forever playing second-banana to Fair Isaac, Experian has tried to push its own scores through the years. There was the CreditExpert, The National Risk Score ("used by lenders across the nation... We have altered the scale to make it easier to compare to other well-known models"), and the PLUS Score. But, even after finally settling in and pushing hard with PLUS, schizophenic Experian couldn't wait to take up even more shelf space with yet another gambit: VantageScore. Experian was the first of the three consumer reporting agencies to sell consumers the jointly-developed score. Experian's press release soft-pedals the idea that they couldn't wait to peddle another score, not even mentioning that it was the first of the three consumer reporting agencies to bring it to the consumer market.

Broad-based credit bureau risk scores are sexy

In the discussion leading up to the 2003 amendments to the Fair Credit Reporting Act, we heard the familiar lament about credit file inaccuracy. But who has time for that tedium? Credit scores are more fun to talk about because they're so mysterious. So little is known, conjecture over cocktails flies high. Correct coding of inquiries to credit files? Off the radar. Credit reports decimated by inaccuracy after a bankruptcy, punishing the bankrupt a second time? Not even a whimper. It's the credit score we like: The distallation of your habits into one tidy number. For lenders, it's how to tell if the guy with two late payments two years ago is a better risk than the guy with one late one year ago. For consumers, it's their own measure of worth.

Hardly a day goes by that a story about credit scoring doesn't appear in a publication somewhere in the U.S. The "mystery" of credit scoring story stands waiting for the day nothing else is happening and finally becomes grist for the newpaper / internet / magazine mill. The intrepid journalist investigates the notion online and comes up with the same story a thousand others have written. It consists of a flourish at the beginning, a flourish at the end, and in the middle, the usual points, more or less:

1. 5 main criteria that determine the score (frequently illustrated with a pie chart)
2. Score range
3. Admonishment to check one's consumer file (represented by a credit report) for accuracy
4. A comparison to SAT scores
5. Vague instructions on how to improve the score

That story has been written to death. The reporters go to this page,

http://www.myfico.com/CreditEducation/CreditScores.aspx

cull what they think is unimportant, paraphrase the remaining points feigning originality, make a few phone calls to pepper the article with quotes, slap it together and foist it on you. Few bother to mention the page above which would, of course, make their article pointless.

Some of the favorite cliches: Demystify, myths, mystery, SAT, 3-digit, pioneered, algorithm, proprietary, breakdown, risk, snapshot, model, 1956, most widely used.

You can find the same thing at any number of commercial web sites—those with something to sell you where you have to use credit and a score—mortgage loans, for instance.

Running on fumes

An obsession with credit scores has overshadowed a trait that, ironically, while strengthening financial security, makes credit histories and scores less relevant: Personal saving habits. Loan underwriters and their automated underwriting systems view the saver as less likely to default on a loan obligation because they have money in the bank to see them through a job loss, a medical calamity or car repairs. And a down payment from savings lowers the risk of lending by creating equity, decreasing reliance on the borrower's credit quality (represented by the credit score).

Federal government statistics show an actual negative rate of savings for the first time since the Great Depression. In June, 2005, the rate was 0.0%—no savings, that is. Unbelievably, the figure turned into a less-than-zero number: In May 2006, personal saving as a percentage of disposable personal income was at negative 1.6%.

Playing right along, in June of 2006, government sponsored enterprise Fannie Mae removed the final $500 minimum contribution for low-to-moderate income borrowers. And, if a down payment or funds for closing costs is required, "cash-on-hand" is now acceptable; no bank account required.

Not to be outdone, the House of Representatives passed a bill in July, 2006, lowering the down payment requirement for FHA home loans. The Federal Housing Administration wants to reclaim its Depression era legacy as saving goes back to Depression era levels, too.

Here is an introduction to the practice, and to the four companies that are the rule makers, referees, winners of the spoils, and the keepers of the number that can make or break you. Look at the person next to you, your competitor. Where do you, and he, rank? Who will be denied? Who will be accepted? Who will pay the higher rate? What is your score, anyway? Welcome to the Information Age. Welcome to Information Warfare.