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A Big No: Lenders are asking for higher numbers on all-important, but mysterious credit score
AP File Photo
Citigroup CEO Vikram Pandit said that borrowers should accept a new world of tighter credit as financial institutions recover from months of bad loans and failed banks.
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Published: June 28, 2009
As banks tighten their lending standards, one number is playing an increasingly critical role in determining the financial fortunes of consumers: the credit score.
Lenders use them to decide whether to extend credit and at what interest rate. As lenders demand higher scores, more Americans are having trouble getting loans.
Others aren't getting loans at all because their scores have dropped. They may have lost their jobs and not kept up with credit-card and mortgage payments, or in some cases card companies have taken adverse actions against them. Eager to mitigate risks, card issuers have closed accounts or slashed credit lines, leaving customers with less available credit. Customers who have used up much of their credit then are closer to maxed out, which further hurts their scores.
To add to their crisis, people who try to take matters in hand and pay to find out their credit scores discover that it can be difficult to learn the score that lenders actually use to evaluate them.
"Credit scores have taken on a new degree of importance," said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, an industry group. "In the past it was a question of "What will your interest rate be?', and now it's ‘Will you even get a loan?'"
As a result, credit is less available to both low-risk and high-risk consumers at a time when they -- and the economy -- need it the most.
"The consumer who desperately needs credit right now is in a very bad situation," said John Ulzheimer, president of consumer education for Credit.com. "The consumer who is remaining consistent, the market is passing them by.... You have more cars sitting on car lots and you have houses with for-sale signs."
Jane Graver is one of those desperate consumers. She once had a credit score of about 700, which before the credit crunch made her a desirable candidate for a loan. Most lenders use the FICO score, which runs on a scale of 300 to 850.
Faced with a divorce, serious illness and tough economy, Graver, a small-business owner, missed a few credit-card payments and used up her home-equity line of credit. She was close to being maxed out. Last year, her score dropped to the mid-500s.
Now that lenders are demanding credit scores of 720 or higher, she is considered even more of a risk and cannot get a mortgage -- or even find a landlord willing to rent her a home. Her house in Orange, N.J., sold at a price high enough to cover her mortgage and line of credit, but she is struggling with what to do next.
"It is difficult to cope," said the mother of two. "I am absolutely unable to get a mortgage."
As scores become increasingly important, they have also become increasingly perplexing. Consumers have free access to the credit reports used to determine their scores, but they have to pay to check them. With the heightened interest, many borrowers have been doing just that, buying their scores from a variety of Web sites, only to find out that they might be different from the ones lenders use, according to bank officials and consumer advocates.
"One of the things consumers have to understand about scores is that there are a number of different scores within the marketplace," said Norm Magnuson, vice president of public affairs at the Consumer Data Industry Association, a trade group.
The FICO score, which was developed by a company formerly known as Fair Isaac, is the dominant player in the industry. It is calculated based on the information contained in credit reports, which list a consumer's debts and payment history. Three bureaus -- TransUnion, Experian and Equifax -- keep those credit reports.
However, to compete with the FICO score, the three bureaus united in 2006 to create VantageScore, which ranges from 501 to 990, which they sell to lenders.
Complicating matters is that Experian and TransUnion have developed their own scores, which the agencies call educational scores because they are intended to help consumers gauge their own creditworthiness. Lenders cannot even buy Experian's score. They can buy TransUnion's but tend to go with the FICO score instead.
On its Web site, FreeCreditReport.com, Experian gives people their Plus score if they pay $14.95 a month for a credit-monitoring service, which they can cancel after a seven-day trial period. They have to dig through the terms and conditions before getting to this disclosure: "The PLUS Score is not a so-called FICO score, and may differ for a variety of reasons."
TransUnion also offers a $14.95-a-month credit-monitoring service with a 30-day trial period on TrueCredit.com. That gives consumers access to the bureau's scores. Like Experian, TransUnion discloses on its Web site that its score is not the same as a FICO score.
Equifax gives FICO scores to anyone who pays $14.95 a month for its credit-monitoring service.
Susan Henson, a spokeswoman for Experian, said the educational scores are still a good tool for consumers even if they are not what lenders use.
"The most important thing is they're really measuring the same thing, which is that consumer's level of risk, whether they are an extremely low-risk consumer or whether they are a high-risk consumer," she said.
But some consumer advocates say the educational scores are of little use and too expensive.
Ulzheimer likens them to faux designer bags. "It's like selling a Gucci bag on the streets of New York," he said. It looks like the real thing, but it's not.
"It exposes something two of the three bureaus don't want people to know," he added. "They make a whole lot of money selling scores."
Indeed, the recession has been a boon for many of the Web sites that sell credit scores. Traffic on FreeCreditReport.com, for instance, grew 6 percent, to 6.6 million visitors, in March, according to ComScore, which tracks Web sites.
Sean Craig, a retail manager in Ashburn, Va., was one Experian customer. When he first checked a few months ago, his Experian score was 720. Then American Express lowered his Blue Cash card limit to $5,900 from $11,300. His score dropped to 683, then to 681. When he called American Express to ask why his limit had been reduced, he was told he had too much debt and that his credit score was actually 570.
Craig assumed the Experian score was the one American Express used, but American Express was looking at his FICO score.
"I was shocked when I checked and it was 683. I was even more shocked when I saw it was 570," Craig said. "It's driving me nuts. The whole thing seems utterly arbitrary."
Such big gaps between the educational scores and the FICO scores are not unusual.
"It's a real problem," said Evan Hendricks, author of "Credit Scores and Credit Reports" and editor of Privacy Times. "People are trying to be good, intelligent, educated consumers. They want to see their score, their report. Then they get a "fake-o' score, which is most likely inflated, while the lender is using the FICO score.... People think they're better off than they are."
Adding to the confusion is that even FICO scores can vary. That's because the company regularly updates the formula it sells to credit bureaus. The lenders can choose to buy the new or an older version of the formula, and they sometimes settle on an older version if it is cheaper and easier. "The lenders using scores from an older version, they're not using bad scores," said Craig Watts, a spokesman for FICO. "They're still doing the job but not doing it quite as well as the newer version."
Watts recommends getting FICO scores at Equifax.com or myFICO.com.
Other credit-score experts said a better gauge of a consumer's financial health is the credit report. If they have paid bills on time, have no negative public records such as bankruptcies, and have used less than 30 percent of available credit, they probably have a good score, Magnuson said.
It's clear that's no longer the case for many Americans.
The average TransUnion credit score was 651 in the first quarter of this year, the same as it was the fourth quarter of 2008. But that was a six-point drop from the previous quarter. Experian reported a 5-point drop in the VantageScore, from 751 in the fourth quarter of 2007 to 746 in the fourth quarter of 2008.
Equifax, however, reported an increase in average scores from May 2008 to this past May, from 699.8 to 701.9, which officials attributed to three factors. First, credit-card issuers are taking on fewer new customers so there aren't as many inquiries on consumers' credit reports. Many inquiries hurt scores. Consumers are holding on to cards they have had for a long time, which helps scores. Lastly, more Americans are saving and not using credit.
Lower scores leave people such as Graver in a precarious position. She is struggling to make her online specialty tea business, DuckyLife.com, a success. To do so, she might need a loan someday, and she probably won't qualify. But her most immediate worry is a home. To Graver, having a lower credit score is "a nightmare."
I've "survived four life-threatening illnesses, six surgeries, divorce -- and all as a single mom," she said. "Now I cannot find a place to live."
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