Consumers want access to those powerful, secret credit scores
By Pat Curry • Bankrate.com

The way Americans access credit has changed dramatically in the past decade, thanks in large part to the most important number you're not supposed to know.

Decisions that once took days or weeks can be made in hours -- or even minutes -- because lenders now rely heavily on mathematical models that weigh a host of information and predict how a borrower will behave, based on tens of thousands of other consumers who have similar credit profiles.

A lifetime of financial behavior is distilled into this single number, known as a credit score. The scale for the score runs from about 300 to 900, with the bulk of consumers falling in the 600 to 750 range.

"It has dramatically streamlined the mortgage process for the majority of people," said Michael Feldman, a co-founder of MortgageIT.com. "We're starting to see loans work more like credit cards. They're not so much collateral-based loans as creditworthiness. It results in a smoother process and a lower cost that will be passed along to the consumer. Our dream is to have consumers come to the Internet, hit apply, wait 10 seconds and get a confirmation letter. That couldn't possibly happen without credit scoring."

But at the same time, a growing concern has arisen over the power of credit scoring, and the fact that a consumer's access to the score is restricted. Many consumers aren't even aware that the score exists, much less the enormous impact it has on their ability to get anything from a mortgage to a credit card to car insurance.

And even if they know it exists and how important it is, they may not be able to find anyone who will tell them what their own score is.

Consumers want access to scores
Consumer advocates argue that because credit scores are generated from information in a consumer's credit history, the consumer should have access to the score. Bills are pending in both California and Congress that would require disclosure of the scores.

Lenders say the score by itself is meaningless to a consumer; it's the information in their credit report that is most important.

But for every story of a consumer who sped through the loan approval process because his credit history was reduced to a number, there's another story of a consumer whose loan was rejected or who paid higher rates because the score reflected inaccurate information on a credit report or lacked the ability to see the person behind the numbers.

One Bankrate.com reader, a mortgage banker, lamented that scoring has created a system in which consumers "are no longer considered as individuals anymore, but a point score system. Now, it no longer matters what happened to you to get your credit in bad shape," she wrote. "I had a customer who had been robbed and raped and beaten, could document all of this as a reason for slow payments, hospitalizations, etc. But it all came down to numbers -- she didn't get the loan. Isn't it a shame that like Social Security, we are all just another number?"

The ubiquitous FICO score
Today, the most widely used measurement for credit scoring is produced by California-based Fair, Isaac and Co. and is commonly referred to as the FICO score.

"For mortgage companies, it is the first thing we ask about," said Anthony Hsieh, president and CEO of LoansDirect.com, an online consumer direct lender. "We don't even care about the house because the house isn't going anywhere. (The FICO score) is the single most important piece of information."

The Fair Credit Reporting Act doesn't require lenders to tell customers about the credit score. And Fair, Isaac discourages efforts to give borrowers access to their own scores. If a consumer obtains a copy of his or her credit report from one of the major credit bureaus, the score is not included.

In February, online lender E-LOAN broke with tradition and announced it would begin giving consumers direct access to their FICO scores. All that was required was to fill out a short profile of the kinds of loans a consumer might be interested in. With the score came a description of score ranges and generic information on how the score could be interpreted.

Consumers responded in droves; nearly 14,000 new accounts were opened in a month, E-LOAN Senior Vice President Cameron King said.

Then, in early April, the service was abruptly shut down after Fair, Isaac applied pressure to the credit bureaus to restrict the flow of information to E-LOAN. Contractually, credit bureaus are prohibited from disclosing a FICO score to consumers. The reason for that, according to Fair, Isaac spokesman Craig Watts, was that unless consumers had a lender explain it, they wouldn't understand what it meant.

"Our concern is outside that context (of a lending decision), consumers learning about the score will be apt to make incorrect assumptions and, if the score is thought to be unsatisfactory, are apt to take action to quickly improve the score," Watts said in an interview last month.

Fair, Isaac representatives were "not interested" in commenting for this article. Representatives from the California Bankers Association and the Association of Lending and Credit Risk Professionals did not respond to e-mail and phone calls requesting comment.

The Fair, Isaac response
"Credit scores evaluate a consumer's credit history, so short-term efforts are just as likely to hurt their score and their standing as it will to help them," Watts said in the earlier interview.

" ... Consumers don't typically understand the score changes every time the information in their credit report changes. Acceptable scores vary from lender to lender. Knowing your score doesn't tell you the next lender will embrace you or say you're not up to snuff.

"One of the problems in the current discussion around disclosing scores is credit-scoring models were designed for lenders who already are experienced in the kinds of information and decisions lenders need to consider. They were not designed for consumers who have little experience in borrowing money and even less experience in understanding what makes or breaks a lender's decision," he said. "Generally, consumers don't have much awareness of the policies that need to be in place for credit decisions. Lenders do. They've got all that in front of them -- they use that, plus their expertise, to guide the consumer."

But Hsieh, a long-time lender, said he would be hard-pressed to offer any pearls of wisdom to a consumer with questions about his score.

"There is no official position we can deliver on behalf of Fair, Isaac," he said. "They're asking us to educate the consumer. Please educate me first. We don't know what a FICO score is. I've been in the business a long time and I don't know what it is. We know what it's used for, but the secret ingredient has been kept up in a bottle for so long, no one knows. If someone asks what can I do to improve my score, what do I tell them? They've put me in a bad spot because they've put me in a position to explain FICO."

In fact, Hsieh said he doesn't even understand his own score.

"As a consumer, I would like to know why my score is lower than my wife, who is a homemaker," he said. "If I'm responsible for the family's income, why is her score higher than mine?"

Lawmakers to begin hearings
This month, the California Senate and the U.S. House of Representatives are scheduled to begin hearings on bills that would give consumers more access to their credit scores and the factors that are used to create them.

The federal bill, sponsored by Rep. Chris Cannon of Utah, is an amendment to the Fair Credit Reporting Act and requires credit bureaus to provide any consumer who asks for a copy of his credit report with "all information in the consumer's file at the time of the request, including any information concerning credit scores or any other risk scores or predictors relating to the consumer."

The California bill, authored by Sen. Liz Figueroa, goes much further than the federal version, which only kicks in when a consumer requests the information. The California legislation requires lenders to provide consumers with their score, the information that went into making up the score, and an explanation of how credit scores work in the loan approval process.

"It's not enough to just see the report," said Alex Creel, senior vice president, governmental affairs of the California Association of Realtors, which is a co-sponsor of the legislation. "The lenders say it is enough, but it overlooks the fact that when they use their model to analyze the information, what looks positive to the consumer or benign at worst, can be a negative."

For instance, Creel said, many consumers will open a department store charge account to take advantage of a discount on that day's purchases.

"You do that two or three times over the course of a year, and then apply for a mortgage," he said. "Your credit report shows those four cards. You look at it and your first reaction is, 'I've got good credit. This is great.' Or maybe you think it won't hurt you. But on the score, you have three cards too many and your score is reduced by 20 points so you're not getting the prime rates. Why? Because you had a JC Penney, a Sears and a Macy's card you only used once. You don't know that unless you see the score."

Another commonly mentioned argument for not disclosing the scores is that if consumers don't like what they see, they'll alter their behavior to try to boost the score, which would decrease the overall integrity of the scoring model.

Hsieh discounted the assertion that consumers could make enough of a difference in their score to list that as a valid concern.

"I don't know how to manipulate it, and I see thousands and thousands of loans a year. No way can a borrower make a few phone calls and make their FICO score go up. It's about the depth of history. If the customer wants to manipulate their credit to get a higher score, what's the problem with that?

"I've heard that if you keep a lot of emergency credit cards and don't use them, that hurts your score," he noted. "If a consumer knows that, they can make a conscious decision to cancel it. That's an area, in my opinion, a consumer should know about it. That has no bearing on the credit risk of a consumer.

"Because those cards carry a total balance of $10,000 on one and $5,000 on the other, it adds to his spending ability, and hurts his score. It's more than just the right to see the score, they need to know how to make it work well. The only way to manipulate the score is to pay your bills on time and handle credit wisely."

"If consumers aren't smart enough to understand it, how can they manipulate it?" Creel said. "Either these people are smart or they're not. I don't think the lenders have any good reasons to not give it up. The closest reason at all is they don't want to give up trade secrets. We're not asking for their formulas, or their actuarial studies or their equations for their studies. We just think a consumer should be able to find out if he got a 680 instead of a 720. That's kind of the gist of it."

Score affects the product you're offered
Fair, Isaac also maintains that regardless of a consumer's score, "the mortgage industry is so competitive, it's hard to imagine a consumer not qualifying for a loan somewhere," Watts said.

The question is: What will that loan cost them?

"Do you get the good loan or the bad loan?" said Mark Rakich, chief consultant to the California Senate Business and Professions Committee. "The score doesn't affect just turn-downs, but which product you end up with. The score drives the latter more than just the 'yea' or 'nay.' "

Hsieh was more pointed in his take on the subject.

"That's bull," he said. "Young buyers, first-time buyers, minority groups and the elderly are in the low FICO scores. They're the ones who get trapped in predatory lending. In the mortgage industry, you have a mortgage officer working on commission. His compensation is related to how profitable he can be. Once you find an unsophisticated borrower, it's a free-for-all. You charge all the points you can. Your fundamental duty to find them the best deal goes out the window. We call it the golden club rule. The less they know, the more you can club them."

Beyond that, E-LOAN's King argues, "There's something un-American about any entity that can keep some secret information on you, especially since the information is derived from your own information ...

"I think it comes down to, if people could understand it, they could question it. This (service) was something consumers want. The only people who don't want to do this are Fair, Isaac and the credit repositories."

What the bills hope to achieve
The California measure also compels credit reporting agencies to correct inaccurate information in a "timely manner" and offers consumers more legal recourse when credit reporting agencies continue to report inaccurate information after acknowledging that the information is incorrect.

Both bills are intended to give consumers a fuller understanding of how credit scoring works in conjunction with a consumer's credit history.

"We're trying to get transparency on how the score is derived," Cannon said. "How it's derived is the controversy.

"Fair, Isaac has a lot of questions about this," Cannon said. "They're worried about the proprietary nature of the model. It may be proprietary, but you've got to protect your consumers."

Supporters of the legislation say the protection is needed because credit scores are used to predict more than just a consumer's ability to repay the debt.

"We had a meeting with Fair, Isaac, the mortgage lenders and the credit bureaus," Rakich said. "You can't get a straight answer ... They're so afraid of giving anything that gives a hint of what's inside the black box. It really confirmed in my mind, to some extent, that they're talking about a numerical measurement that, in a macro sense, is a measure of a potential applicant's profitability.

"If they think I'm the kind of guy who takes out debt, and pays it back too soon, the score comes back as a nonprofitable candidate. It would be nice of them to 'fess up to that."

The profitability factor
One industry analyst says that -- among other traits -- a customer's profitability is exactly what the score is designed to measure.

"Generally, the public assumes the behavior (upon which a credit score is based) is the likelihood of repaying a debt," said Walter Kitchenman, a senior analyst with The TowerGroup, a consulting group that provides research and advice on the impact of information technology in the financial services industry. "They think it's all from credit bureaus. Actually, it's much more than that ... . Those variables aren't just to predict repayment; it's profitability, fraud, then risk. People who make late payments, then make the payments -- when you blend things, you're a more profitable customer."

Kitchenman noted that with credit scoring, it's possible for a consumer to not miss a single payment on a bill and still pay higher fees. Factors in determining the score include how many credit cards a person has, the available balances on each, and the number of times his credit has been checked.

There are several reasons, he said, that a lender and Fair, Isaac (which is a client of the TowerGroup) would not want to disclose a credit score.

"Under the Fair Credit Reporting Act, a lender must disclose simple facts that are considered to create the score. That doesn't tell you the individual weight statisticians have assigned to each of those activities. That would be like telling Coca-Cola the formula for Pepsi. Fair, Isaac could be put out of business. It's really the weight of the attributes that people mind disclosing. In telling how it works, it could give information to competitors and fraudsters."

Plus, Kitchenman said, the score a consumer gets today could be different from the one he got the day before because of additional information that came in or because of testing being done on the model. There's also the burden of disclosure and concern about when and what to disclose.

CAN the scores be explained?
But another industry insider says the lenders don't want to explain the scores because in many cases, they can't.

"The problem arises with these institutions, when they do reveal it, they're put in a position of having to understand it, representing fairly and that it's accurately reflected as part of that lending decision," said David Graves, vice president of decision control services at Digital Matrix Systems, a company that specializes in the processing of credit data for lenders. "Bottom line, it brings the bank, the lender and their whole creditworthiness practice into question.

"A lot of the loan officers I've talked to wouldn't be able to do a good job of explaining," Graves said, "and it changes. Every couple of years, they'll have a revision of the score, which complicates it because they're tweaking things. The fear from Fair, Isaac is not that they have to defend the score; it's that it's not being reflected accurately to the consumer."

He also pointed out that, depending on the credit bureau, a consumer's score can vary wildly.

"The score is only as good as the data from the bureau, and I've seen countless examples of a 150-point range on a FICO score from bureau to bureau," he said. "That's very common."

That's important to know, he said, because "the cusp between 640 and 660 is still a major break" for loan pricing.

"If I were a consumer, I'd want the scores from all three bureaus," he said. "The more information you can get, the better off you'll be. The best weapon a consumer has right now is to control the data that drives the score."

In the absence of legislation that mandates disclosure, consumers may continue to be challenged to gain access to their credit score data. But the number of lenders who support disclosure is growing, and the truest form of democracy may be the vote that's made with a consumer's checkbook.

"If they don't want to tell you, close the account and go to someone who will," Kitchenman said. "We have 23,000 financial institutions. Nothing forces you to bank with the guy who won't tell you what you want to know."

Pat Curry is a freelance writer based in Georgia