Lenders look at credit score first

When Ken Bigelow learned he could get his credit report for free, he went for it.

But the 72-year-old Magnolia man became confused and a bit skeptical when Experian, a credit-reporting agency, told Bigelow it would cost him $5 if he also wanted his credit score.

What's the difference between a credit report and a credit score, Bigelow wanted to know, and was Experian trying to pull a fast one?

Scores are a shorthand way to express the raw data in credit reports. They are three-digit numbers generated by proprietary formulas. They are based on a variety of factors, including how much you owe, your payment history and the length of that history.

The same federal law that forced credit-reporting agencies to start making credit reports available for free also required them to make credit scores available for a "fair and reasonable" fee. So Experian was within its rights to charge for the score.

Federal regulators are working to determine what constitutes a "fair and reasonable" price, but no decision is expected before spring. Until then, "anything between $4 and $8 is probably OK," according to Federal Trade Commission attorney Chris Keller.

Lenders like credit scores, said Brad Scriber of the Consumer Federation of America, a Washington, D.C., nonprofit consumer-advocacy group, because "it's quicker to look at a number than to look at three sheets of data," referring to a credit report.

More info on credit scores If you choose to buy your score from one or more of the three major credit-reporting agencies, you will receive a list of the positive and negative factors affecting the score, plus general tips about what you can do to improve the score. If you want a more robust rundown of the factors, as well as a chance to play with a simulator that lets you select specific actions you can take to affect your score, go to www.myfico.com , where the price is $14.95 to get a FICO score and a credit report from one credit-reporting agency, or $44.95 for all three FICO scores and credit reports. Another option is an apparently unique credit-card offer from Providian, www.providian.com, which includes free online access to a FICO-based credit score calculated by TransUnion.

A credit-score difference of 50 points can have significant consequences, Scriber and others say. For a Washington resident carrying a $200,000 mortgage over 30 years, for example, a 50-point spread could mean an extra $80,000 in interest payments, according to a loan-savings calculator at www.myfico.com/
myfico/CreditCentral/LoanRates.asp.

Just as credit reports vary according to the underlying information provided by businesses, so do the scores that reflect them. More than one company produces credit scores, and each uses a different model to calculate them.

Their guts — the algorithms upon which scores are based — are closely held secrets, which makes it hard for consumers to challenge them. Consumers who think their score is inaccurate need to search for errors in the underlying credit reports.

Some consumer advocates, including Birny Birnbaum, a former associate insurance commissioner in Texas, are critical of credit scores. He contends that scoring models focus on a consumer's economic status rather than the record of paying bills on time, which tends to discriminate against certain minority groups. A credit-scoring industry spokesman disputes that charge, denying that race, income or other prohibited factors are used to assess a consumer's risk.

FICO and non-FICO

Minneapolis-based Fair Isaac Corp. — maker of the so-called "FICO" score — is regarded as the dominant player. On www.myfico.com, Fair Isaac claims that more than 75 percent of the 2003 applications for credit in the United State involved a FICO score.

Each of the major credit-reporting agencies — Equifax, Experian and TransUnion — relies on the FICO model to generate scores for businesses and lenders, though they are branded differently. For example, TransUnion calls its FICO-based score "Empirica."

Of the three, only Equifax markets a FICO-based credit score directly to consumers for $6.95 at www.annualcreditreport.com. The other two agencies do likewise, but they offer non-FICO-based credit scores; Experian charges $5 and TransUnion $5.95. (Those low prices are available only during the free-credit-report process; otherwise, at the agencies' Web sites and at myfico.com, the scores come bundled with other data at higher prices.)

When it directed agencies to make scores available to consumers, Congress did not dictate which type. That left the door open for the agencies to offer generic scores — and avoid paying a commission to Fair Isaac for a FICO score.

Perhaps the most obvious difference among the scores is their ranges. For example, Equifax uses FICO's credit-score range, from 300 to 850. But TransUnion uses a range from 400 to 925, and Experian a range of 330 to 830.

Spokespeople for TransUnion and Experian defended their non-FICO models, saying the scores serve as educational tools that help consumers improve their financial health. But one potentially confusing result of the varying models is that the same consumer ends up with different scores.

For example, a credit score of 790 from Equifax translates to a score of 868 from TransUnion and to a score of 776 from Experian. Scriber, of the Consumer Federation of American, said consumers could count on roughly equivalent scores so long as the underlying data on file with each credit-reporting agency are essentially the same.

Scriber says if a consumer doesn't want to buy all three credit scores, he or she should try to find out which one a lender is likely to check. A lender probably will check all three credit-reporting agencies if a transaction involves a major debt, such as a car loan or home mortgage.

In that case, it probably makes sense to shell out $40 or $50 to buy all three scores to know in advance what they all show. "That cost is minor compared to the headaches that can be caused by not knowing if something's wrong," says Tom Quinn, Fair Isaac vice president.

More companies use them

Credit scores have taken on greater significance in recent years as insurance carriers have adopted them to help decide whether to issue auto and homeowner policies as well as the rates to charge, Scriber said. Landlords sometimes consult them, and cellphone companies check them before activating service.

Until a consumer-advocacy group objected in September, a Dallas-based utility, TXU Energy, planned to charge customers different rates for electricity based on credit scores. A TXU spokesman recently justified the proposal — which still could be revived — on grounds that a small set of deadbeat consumers made the utility's "bad-debt balloon."

Credit scores are "an important part of your credit profile," said Norma Garcia, a San Francisco-based attorney with Consumers Union, publisher of Consumer Reports. "While a credit report is important, it doesn't replace a credit score, and since most lenders look at your score first and your credit report second, it behooves you to know what your score is."

Peter Lewis: 206-464-2217 or plewis@seattletimes.com