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Credit-Score Outrage

Why the Ultimate Numbers Game Is Out of Control

Your credit score can determine whether you get a loan, but it’s impossible to see the score that lenders use unless you get turned down for a loan. What’s worse, the credit-score approximations that you buy can vary from your actual score, and it’s difficult to tell how they are calculated.

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Other than perhaps the scores on standardized college admissions tests, no scores have as much influence over people’s lives as their credit scores do. Your credit scores can determine whether you get a credit card, a mortgage, or an automobile or other loan, and what interest rate that you will pay. A low score could prevent you from renting an apartment or getting a cellphone contract. It also could be a factor in how much that you pay for home or automobile insurance. In some states, it even could raise your insurance premiums.

Companies have sold credit scores—alone or as part of credit-monitoring or identity-theft-prevention services—for years. However, the scores that consumers buy aren’t the same ones that lenders use. A consumer can get a number of scores that can vary depending on the scoring model, the scoring scale, the credit bureau from which it came and the day that it was pulled.

“If you purchase four or five scores, there can be a very large difference—100–150 points,” says Rod Griffin of credit bureau Experian.

Consumer Financial Protection Bureau (CFPB), which was created in July 2011 as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is concerned that the proliferation of scores sows confusion. It says consumers who misunderstand a score could over- or underestimate their creditworthiness and apply for or accept the wrong type of loan. CFPB is preparing an in-depth analysis of the differences between scores that are sold to consumers and those that are used by lenders. If CFPB finds that consumers were harmed and misled, it could take regulatory action against the credit bureaus. But it’s unclear when the report will be released.

The Dodd-Frank act requires banks and other lenders to disclose to the consumer the credit score that they used when they reject a loan application or give the consumer less than the best terms that are available to top-quality borrowers. That’s a step in the right direction, but consumers should have better access to their scores.

We also would like CFPB to make it easier for consumers to fix mistakes in their credit reports and to curb the growing use of credit information in decisions that aren’t related to credit, such as employment. But whether CFPB can take these steps depends on whether Congress lets the agency perform its mandate. At press time, former Ohio attorney general Richard Cordray was appointed director of CFPB after Congress held up the appointment process for months, and he was vague about what he plans to do with credit scores. Furthermore, it’s unclear how much regulatory power Congress will allow CFPB to have.

Scratching at the Numbers

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But it’s all too clear to us that without CFPB, credit bureaus have no regulation and thus can run a number on consumers.

KNOW THE SCORE. A credit score is derived by applying a mathematical formula to certain items in a consumer’s credit file at one of the three major credit bureaus in the United States—Equifax, Experian and TransUnion. (Smaller credit bureaus exist, but lenders use these three.) Scores are rank-ordered, so a consumer who has a score of 720 is less risky than a person who has a score of 719 and riskier than someone who has a score of 721.

A FICO score, which is the result of a complex calculation that was developed by Fair Isaac, is the score that lenders use the most when they request your credit report and decide whether to give you a loan. If your FICO score is at least 750 (850 is the top), you generally will get the best terms that are available. Even a few points can matter, because many lenders price their loans in groups.

For example, the average rate nationwide on a 30-year fixed-rate mortgage in late January was 3.68 percent for FICO scores that are above 760, 3.90 percent for scores that range from 700 to 759, 4.07 percent for scores between 680 and 699 and so on, according to Informa Research, which is a market-research company.

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