Disclosing Information About Credit Scoring - CREDIT SCORE
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CREDIT SCORE: Disclosing information about credit scoring
The Commission's July, 1999 public forum, "The Consumer and Credit Scoring," generated vigorous discussions among both the audience members and the panelists. These discussions indicated that consumers are concerned primarily with being able to obtain their credit scores and understand the process by which their scores were generated. Consumers want somebody to open the "black box" and let them see inside so that they can understand what information was considered, who made the decision, and what steps they can take to improve their scores.
A. Consumers Want Information About Credit Scoring
Consumers want answers to what seem to them fundamental and easily addressed questions: What information was used to calculate the credit score? How important is each factor in the analysis? Does it matter if a prior loan was from a finance company or a bank?(12) If so, why? How many credit accounts or inquiries(13) are too many or too few? How can I improve my score?
The Commission's forum made clear that consumers and those who counsel them want and need more information about credit scoring so that consumers can obtain the credit they need at the best possible price. One consumer at the forum related his personal experiences in preparing to obtain a mortgage for a home purchase. The consumer was aware he knew he should obtain his credit report and make sure all of the information reported about him was accurate.(14) But, he had only recently learned about the use of credit scores. He was upset that he neither had access to the score nor to information about how that score was calculated. He was able to determine that the number of credit cards he held and the available balance and credit limit on those cards could affect his score. He could not find out, however, how they affected his score and what action he could take to have a positive impact on his score. He was also surprised that the mortgage professionals with whom he consulted were unable to answer his questions and seemed to know less than he did about credit scoring.(15)
A housing counselor who served as one of the panelists advocated education of the mortgage industry, non-profits, and prospective home buyers as the key to fostering an understanding of how scores affect credit decisions. She felt strongly that consumers need to understand where a credit score positions them in the mortgage market. Consumers also need to obtain their credit scores early, before they enter the real estate market. They need to meet with somebody who understands scores and can go through their credit report and assess ways to improve their creditworthiness and thereby improve their credit score.(16)
B. Information Must Be Provided In A Meaningful Context/b>
Many at the forum appeared to support strongly the release of scores, but only "with meaningful explanatory data to better shop for mortgages and . . . evaluate lender products."(17) Industry panelists generally believed that providing consumers with scores in the abstract, out of the context of a specific transaction, is not particularly useful. Participants agreed that consumers need to understand what behavior affects their scores so that they can alter their credit activity over time to become better credit risks. The creditor who ultimately makes the decision is the only one who knows what type of score was used -- a credit bureau score or a custom credit or mortgage score -- and what other factors in addition to the score may have been considered in the decision.(18) Loan officers and counselors need to be educated about the lender's particular use of credit scoring so that they can provide consumers with their scores in the context of a particular transaction.(19)
C. Complexities Involved In Disclosing Information
The Commission recognizes that providing information that will make credit scores meaningful to consumers is not without difficulty. While the questions consumers want answered seem reasonable enough, such as how many credit cards are too many, the answers are not necessarily that simple. The consumer who wants to know her credit score also needs to understand which credit score she wants -- a score that came from a custom model, a mortgage bureau score, a credit bureau score -- or perhaps she wants access to a decision from an automated underwriting system. If she wants a bureau score, which one should be given? Importantly, if a consumer wants to be provided with the same score the CRA provided to the creditor, she needs to understand that her score may have changed over time.
The Commission is aware that credit scores are not static numbers. Closing an account or missing a credit card payment may affect a consumer's credit bureau score, but so may the simple passage of time. As time passes, the length of the consumer's credit history increases. A longer credit history may improve a consumer's credit score. It also may cause the significance of any late payments to decrease, which in turn may favorably affect the consumer's credit score. Credit scoring models are based on a complex interrelationships of factors. For example, the optimal number of credit cards one should own to maximize a credit score will depend on the circumstances of a particular consumer. Thus, it may be beneficial for one consumer to close some credit accounts, but, for another consumer, closing accounts and consolidating debt may have a negative effect on other factors, such as credit utilization (that is, the amount of debt outstanding compared to available credit).
ADDITIONAL CREDIT SCORE RELATED FACTS
How Can I Find Out My Credit Score?What’s In Your ScoreMistake 4 That Can Lower Your Credit ScoreImproving Your Fico® ScoreCredit Score Interpretation Credit Scoring What Happens If You Are Denied Credit Or Don't Get The Terms You Want?| Find Credit Facts |
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