Taking the mystery out of credit scores

Lenders look beyond numbers, which differ with varied sources

Dollars & Sense

April 14, 2002|By Betty Lin-Fisher | Betty Lin-Fisher,KNIGHT RIDDER/TRIBUNE

When it comes to credit scores, it's the details that count. Credit scores are those elusive numbers that for years were secretive figures seen only by lenders deciding whether to approve a consumer's application.

Within the past year, the major credit bureaus - Equifax, Experian and TransUnion - have begun offering credit scores to consumers in addition to detailed credit reports that show their credit history.

Credit scores assign a number to a person based on the information in the individual's credit report using complex mathematical equations. The number, which summarizes the information in your credit report, is designed to tell credit lenders the likelihood that a consumer will repay a loan.

Jan Davis, executive vice president of consumer products for TransUnion, compared a credit score to a trip to the doctor:

"Your credit score is kind of like your cholesterol number. You can't impact the number directly. You have to look at the underlying reasons," she said.

Scores have gained popularity since the early 1990s, when mortgage lenders began using the figures to make the loan-approval process more objective. Scores are now used by virtually all lenders for loans for homes, autos and credit cards.

There are literally hundreds of different models designed by businesses to come up with a credit score, though the most widely used is the FICO score. It ranges from 300 to a high of 850 and is produced by Fair, Isaac and Company, which pioneered the technology for credit scores in the late 1950s.

Until 1989, the company was developing custom credit scoring models for individual lenders, many of which are still used. But now, at least three-quarters of all mortgage decisions use the FICO score, as do 23 of the largest 25 credit-card issuers and 40 of the 50 largest financial services institutions, said Craig Watts, consumer affairs manager for Fair, Isaac and Company.

Credit scores were originally designed for lenders, and the company has had to work hard to translate a lot of the "insider" language for lenders into user-friendly information for consumers, Watts said.

Fair, Isaac has partnered with Equifax to offer the FICO score through the credit bureau. Competitors TransUnion and Experian offer their own versions of credit scores to the public.

But part of the potential confusion among consumers comes when they find out their credit score from one of the bureaus and assume the credit lender is looking at the same score. Lenders have access to the FICO score from the three bureaus, but consumers have access to those FICO scores only through Equifax.

So, I may apply for a loan with my Equifax credit score in hand, but my lender may have pulled a FICO score using the data in my Experian credit report.

Or the lender may have gotten my FICO score based on my TransUnion credit report, which may have slightly different information based on what is reported by my creditors.

(Not all creditors report all of your history to all three bureaus, which is why it's important to check your credit reports from all three bureaus for inaccuracies.)

Or another scenario may have my lender looking at a totally different score by another vendor.

The bottom line is that you should always ask your lender what scoring model it is using, said Paul Richard, executive director of the Institute of Consumer Financial Education.

Though the scales for the scores from the three credit bureaus vary slightly, they all look at similar factors in credit reports when determining the score - for instance, maybe you have too much debt, too little credit history or a history of late payments.

While many consumers get caught up in the actual number that makes up their credit score, experts say what's more important are the factors that went into the score.

"Just like your cholesterol number, you can't really affect the number, you have to affect the behaviors," Davis said.

All the different scoring models list the risk factors - or credit behaviors - that are negatively affecting your score. Fixing the negative factors could raise your score in the future.

"They always sound negative, whether you have a great risk score and are very creditworthy," said Rod Griffin, spokesman for Experian.

A few of the scoring models also list the positive things raising your score.

Whether your actual score makes or breaks a loan might depend upon the lender. It might be more as if your score opens or closes a door further to a loan.

Credit scores are ever-changing. Though they probably won't change drastically, the score will vary according to what is in your credit report at a given time and what information about your payments - or lack of payments - to your creditors is shared with the bureau.

"Scores for the most part have no shelf life," said Watts, who added that lenders will typically look at your score a few times during the loan-approval process to make sure nothing drastic has changed in your file.

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