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Credit scores - What you don't know can be held against you

(Article from Consumer Reports Magazine, August 2005)

Your mortgage, your car loan, your insurance premiums, where you live, who employs you--all of these life staples can depend on your credit score and the credit report on which it’s based.

Lenders have long used credit scores and reports to determine whether to lend you money and how much interest to charge you. But these days auto insurers are using credit-based scores to calculate premiums. Employers are using credit checks to determine whether you’re a worthy hire. And landlords are using them to figure out whether you’ll be a reliable tenant. Some utility companies are linking credit scores to the size of the deposit you must pay to have your power turned on.

  CR Quick Take

• Credit scores and reports are now used to determine the rates you pay on loans and credit cards, your insurance premiums, whether you get a job or an apartment, and how much you have to lay out to get the electricity turned on.

• Scores from the three credit bureaus can vary by 50 points or more because of errors or out-of-date information. That gap could result in a $100-per-month swing on a $150,000, 30-year fixed-rate mortgage.

• You can improve your score by applying for new credit cards sparingly and by using old ones regularly.

• Credit scores are based on credit reports, which will be free to all consumers by Sept. 1 2005. But so far, the government-mandated Web site set up to provide the reports is difficult to use and doesn’t include credit scores. One alternative: Buy your reports and scores at


Despite the credit score’s growing importance in so many aspects of Americans’ lives, only a fraction of consumers know their score and what they may be doing to help or hurt it, or how it could be used against them. Only 33 percent of consumers have obtained their scores, according to a survey of about 1,600 consumers published this year by the Government Accountability Office. Another 2005 survey of 1,013 people by the Consumer Federation of America, an advocacy group, and Fair Isaac Corp., which created the credit score formula, found that 49 percent of consumers do not understand that scores measure credit risk.

What is more troubling is that the proprietary formula behind this all-important number is largely a mystery and the data on which it’s based are often inaccurate. Twenty-five percent of credit reports, which list your credit and borrowing activities, had errors serious enough to cause consumers to be turned down for a loan or a job, according to a 2004 survey by the U.S. Public Interest Research Group. And correcting errors can be arduous, despite a new law that is supposed to make it easier to stay on top of your score and, if necessary, set the record straight. For one thing, the Web site mandated by the Fair and Accurate Credit Transactions Act of 2003, requiring the three major credit bureaus to provide consumers with one free credit report a year, is devilishly difficult to use.

But there are steps you can take to manage your credit score so that it’s as accurate and as high as it can be. That can potentially save you thousands of dollars on loans, insurance, credit-card payments, and lost employment opportunities, and can also help you ward off identity theft.

What the score is

The company behind the credit-score phenomenon, Fair Isaac, developed its scoring system in 1989 to give lenders a shortcut for judging applicants' credit-worthiness. The three major credit bureaus (Equifax, Experian, and TransUnion) use the system to calculate a so-called FICO score based on the data they collect about you from banks and credit-card companies, such as payment histories and debt, and from public records, such as bankruptcy filings and tax liens. But when we asked Fair Isaac to walk us through the math and explain how it tallies the number, all it would say is that its formula involves 22 pieces of data and that the final figure, from 300 to 850, hinges on mathematical models that forecast behavior.

Experts say that the score has proven successful in predicting who is likely to pay bills on time and that it is an efficient way to bypass reams of credit-report data. They also say that to offer consumers rapid loan approvals--these days approval for a credit card can be granted in a matter of seconds--lenders must rely on a simple scoring system.

In a sense, the credit score is to your credit report what the five-letter grading system is to schools; it cuts through the verbiage and quickly separates the good performers from bad. The median U.S. credit score is about 720. Most consumers fall into one of the following five categories: above 800; 750 to 799; 700 to 749; 650 to 699; and 600 to 649, with more than a quarter in the 750-to-799 range.

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