An AT&T Corp. communications technician in his mid-50s who makes $60,000 annually and has lived in his home for 15 years recently had a rude awakening when he couldn’t qualify for a low-interest loan for home improvements.
Lenders kept telling him he should find out his credit score, but some wouldn’t tell him what it was. Others said his score was in the mid-500 range on a scale of 200 to 900, indicating he wasn’t a good credit risk and they weren’t going to give him a loan. Still others quoted him high interest rates–11 and 12 percent–on a subprime, non-conforming loan.
The technician, who didn’t want his name published, hasn’t defaulted on loans, filed for bankruptcy or had any judgments against him.
The problem was that he made a few late payments on credit cards and was more than 30 days late on one mortgage payment this year, said Barry Roffman, a banker at Rock Financial in Bingham Farms, Mich.
“That will do it. That late payment on his mortgage hurt him big time,” said Roffman. “The first thing everyone looks at is the score. It all boils down to the score.”
The big change is that people have been replaced by computers that spew out universal credit scores that don’t take into account how long people have lived in their homes, their income and time on the job. There’s no chance of going from one bank to another and sweet-talking lenders.
In the last few years, an increasing number of lenders and companies have begun using computerized credit scores to help them determine whether to approve various types of loans and financial arrangements.
But many people don’t know what credit scores are or how they affect their lives.
Credit scores can determine whether you can get a car loan or a credit card, how big a mortgage you can afford, what kind of rental property you can purchase and whether your home and automobile insurance rates will go up, said David Shellenberger, product manager for Fair, Isaac Co., the California company that produces FICO scores.
“Credit scoring is used to determine whether people will pay their bills on time, but it’s true that scores can be used for other reasons,” Shellenberger said.
The main benefit of credit scoring is that people with good credit are getting loans approved almost overnight, and mortgage companies especially like it because the cost of processing loans has gone down, Shellenberger said.
There also are drawbacks. Sometimes mistakes are made on credit reports, and people struggle to get them corrected. Meanwhile, their credit is damaged temporarily.
In addition, some people say scoring is unfair because it doesn’t take into account a person’s income, how long a person has lived in a home or worked at a job–the way lenders did years ago.
Credit scores appear on credit reports and are compiled by three national credit reporting agencies: Equifax, Experian (formerly TRW) and Trans Union. Each agency has its own scoring method, but all provide a list of delinquent accounts, late charges and related data, as well as the score itself.
The systems rely on computers that compile scores after looking at individuals’ history of paying loans and credit-card bills, as well as public records that can show tax liens, judgments, bankruptcies and delinquent school loans.
The computer also automatically checks out how often potential borrowers apply for loans and credit cards and how much is owed.
Typically, five factors separate the cream of the crop from those who might get low scores and have difficulty getting loans. Those factors, according to Shellenberger, are:
– Past delinquency. People who have failed to make payments in the past tend to do the same in the future and therefore are considered high risk.
– Credit habits. Someone maxed out or close to the limit on a credit card is considered a greater risk than someone with a small balance.
– The age of a credit file. Fair, Isaac’s model assumes people who have had credit for a long time are lower risk than those who haven’t.
– The number of times a person applies for credit. Scoring systems frown upon those who have initiated several requests for credit cards, loans or other debt instruments over a period of time.
– A customer’s credit mix. Someone with only a secured credit card is generally riskier than someone who has a combination of installment and revolving loans.
“The Fair, Isaac system looks for patterns,” Shellenberger said. “It takes into account when a problem occurred and whether it is part of an ongoing problem.”
Another problem with credit scoring is that the score is widely distributed and so affects all your credit relationships. And it’s difficult for a person to change his or her score once it’s a problem, said Gerri Detweiler of Debt Counselors of America.
The scoring process also tends to confuse most people, she said. “Credit scores are good for people who have no credit problems, but there are plenty of people who have credit problems for one reason or another, and it could take them a long time to change their score,” Detweiler said.
Detweiler whose service helps people straighten out financial problems, on a sliding scale based on income, said she has known good people who had money woes after getting divorced or had financial setbacks because of medical problems, and it took them years to improve their score.
“For a lot of people the scoring process is scary because they don’t know what’s involved, why they were scored in such a way. And they often don’t know how to make things better,” she said.
To get a credit report, call one of the three major credit-reporting agencies and ask for the one it produces. Call Experian at 800-682-7654; Trans Union at 800-888-4213 or Equifax at 800-685-1111.
You get a complimentary credit report from the agencies if you have been denied employment, insurance or a loan within the past 60 days.
You also can get consolidated credit reports by calling Detweiler at 800-680-3328.
LEARN THE LINGO
Knowing the following terms will help you plow through a discussion with a lender concerning your credit report and score:
– FICO score. This also is called a Fair, Isaac score. It is named after Fair, Isaac and Co., the California company that invented scoring software.
– Risk scoring. If you tried and failed to get credit, your loan application probably was graded for risk potential. It’s one of many factors lenders use to determine whether they should approve a loan.
“In risk scoring a lender determines your risk score by comparing your qualifications and score to qualifications and scores of other customers and seeing what you have in common with people who have paid their bills on time,” said Gerri Detweiler, education adviser to Debt Counselors of America Inc. in Rockville, Md.
– Reason codes. Lenders don’t have to tell you your credit score or grade, but they are required by law to give you reasons you were turned down for a loan. They usually will provide reasons in writing or give consumers the toll-free number for their customer relations department.
– Charge-offs. Occur when a lender gives up tryying to collect a delinquent loan or credit-card bill the customer hasn’t paid.
– Inquiries. Your credit report includes a list of inquiries — the record of everyone who has seen your credit file in the past one to two years. Lenders get nervous when they see you have applied for a lot of credit.
– Capacity. This refers to your ability to pay a loan based on your money-management skills, income and financial position.
— Knight-Ridder/Tribune
