There’s something called Occam’s razor, which says basically, the simplest answer to a problem is likely the right one.
If only that were the case with credit scores. Confusion abounds over those three-digit numbers that rule our borrowing lives, as they dictate to lenders how great a risk we pose of not paying back that loan.
The three major credit reporting agencies, or CRAs, (Equifax, Experian and TransUnion) collect data on consumers; that data is used to prepare assessments of loan default risk, indicated by a score. In the past, the three reporting agencies have often come up with different scores. They recently collaborated in adopting the same scoring system, called VantageScore; but different numerical scores can still result, since the agencies might crunch the numbers with different data.
While consumers would prefer to see a single, consistent score, that has been difficult, if not impossible, to achieve. A mortgage lender may ask reporting agencies for a risk assessment profile that’s different from an insurance agent. While credit scores in some cases may be similar, there could be large differences that have a big effect on a consumer’s ability to get a loan.
Those scores also have a direct bearing on the cost of loans. Here’s an example from a quiz on credit scores (which you can take online at www.creditscorequiz.org). On a $20,000 auto loan lasting 60 months, about how much more would a borrower with a low credit score typically pay than a borrower with a good score?
The answer: More than $5,000. That’s a big difference, one that will be felt over the life of the loan in terms of steeply higher monthly payments.
Until recently, FICO (Fair Isaac Corp.) was the major player in determining credit scores. It fought VantageScore in court but lost an appeal in federal court recently. That could spur adoption by more lenders of a system VantageScore says will result in more consistent scoring.
That kind of change may please the newly formed Consumer Finance Protection Bureau, or CFPB. Soon after its official launch, CFPB released a report noting it’s “likely that the credit score that the consumer receives will not be the same score as that purchased by a lender to whom the consumer applies for a loan.” The report also noted that “many of the credit scores sold to lenders are not offered for sale to consumers.” That’s a sore point with many consumer advocates.
There is some light at the end of the credit tunnel. In July, new federal rules took effect making lenders tell consumers what credit score they used if they turned them down for a loan or imposed a higher rate due to that score.
The CFPB is following up its report with a project, collecting and analyzing data from 200,000 consumers at each of the three CRAs. That analysis may lead to suggestions — or something stronger — to bring transparency to this historically murky arena.
Consumers should educate themselves about credit reports and scores. The CFPB website, www.consumerfinance.gov, offers explanations and advice about maintaining and-or repairing your credit rating. The “Downeaster Guide to Consumer Credit” offers advice tailored to Mainers’ needs (visit www.credit.maine and click “Publications”).
Consumer Forum is a collaboration of the Bangor Daily News and Northeast CONTACT, Maine’s membership-funded, nonprofit consumer organization. Individual and business memberships are available at modest rates. For assistance with consumer-related issues, including consumer fraud and identity theft, or for more information, write: Consumer Forum, P.O. Box 486, Brewer 04412, go to necontact.wordpress.com, or email email@example.com.