Recently, Fair, Isaacs & Co., the company that provides the mathematical computing for credit scoring and Equifax, one of the three primary credit reporting bureaus, came to an agreement.
They decided that they would set up an online service before the summer that would allow consumers to view their credit score, and find out what factors were considered in creating the credit score. In addition, there would be information provided on how lenders might use the actual score in lending decisions.
Which is an about face for an industry that until only recently insisted that credit scoring was too difficult for consumers to understand and interpret correctly.
A credit score is like a personal financial SAT. Your credit history is pulled and each detail on the report is assigned a number. The mathematical computation is fairly detailed: Not only does each credit card you own receive a number, but that number is based on the current balance, how timely you make your payments, if you have ever missed a payment, and how much unused total credit you have available at any given moment.
Dick Lepre, president of Homeowners.com, and a mortgage broker based in San Francisco, says for lenders, it’s not necessarily how much debt you carry that’s the final issue, it’s how much credit you have access to at one point in time.
The way Lepre explains it, even if you never carry a balance, but you have a credit limit of $20,000 per card, to a lender, that available credit means you could go out one day, charge a car, and suddenly be $20,000 in debt.
Multiply that by the 5 or 6 charge cards consumers typically carry around in their wallets, and it’s easy to see why credit scores are negatively affected by available, though perhaps unused, credit.
If you are rejected for credit, federal law requires the lender to give you a copy of the credit report that sunk your application and tell you why you were rejected. But lenders are not required to tell you your credit score.
Fair, Isaac & Co. created the so-called standard for credit scoring. The final result is a three-digit number that ranges from 300 to 900. Each lender may use or interpret the final number in a different way, and some lenders use proprietary credit scoring programs.
Grade “A” borrowers typically have credit scores above 750. But even there, some lenders may go lower and some may go higher.
What’s clear is that the future of lending will be based on the consumer’s credit score, which makes the task of cleaning up and maintaining your credit even more important.
David Lereah, chief economist of the National Association of Realtors, and the author of The Rules for Growing Rich, says ultimately, the credit score will dictate whether the consumer gets the best loan at the best rate, or something less.
Generally speaking, if you’re an “A” borrower, you get the best loan on the best terms, whether you’re at the top end of “A” or the bottom end of “A,” Lereah says. But he predicts that lenders will soon start to sort borrowers and those at the top end of “A” will get cheaper loans because they are the least risky borrower, and the lender will reward them for that status.
Some lenders are already doing that. PricelineMortgage.com says it has some lenders that react to the credit score when giving a mortgage quote. Hence, borrowers with perfect credit may end up with a rate that is far cheaper than if they have even one blemish on their report.
Currently, you can get details about your credit score at the Fair, Isaac website (www.fairisaac.com). The company also has posted a detailed list of factors that influence a credit score. Many details about the new site that the company is setting up with Equifax, including how much the service will cost, what it will be called, and which web site will be sued, will emerge over the next few months.
In the meantime, you should clean up your credit. Next week, I’ll run down the list of what constitutes good and poor credit and how you can improve your credit history and your credit score.
Published: Jan 1, 2001