America's Obsession With Credit Scores
Do you know your credit score? Many Americans do, and more are learning about it daily. While this is a big step in the right direction in the pursuit of financial literacy, some Americans have become “score obsessed.” There is an argument to be made that knowing your credit score could actually be harmful for a consumer, but more on that later since some major players in government believe the opposite. If those players, specifically Consumer Financial Protection Bureau (CFPB) Director Richard Cordray and/or some members of Congress, get their way … even more consumers will know their credit score, and will obtain this information for free. First, let’s focus on the comments made earlier this spring by Mr. Cordray regarding the practice of some credit card firms who have started putting consumers’ credit scores on the monthly billing statements. Does the word “Awesomesauce” sound familiar? How about if it was stated energetically by a young female voice? Perhaps a commercial about a Surprise party for someone who hates surprises? These are some of the Discover “It” Card commercials promoting their policy of adding the FICO credit score to the statement each month. Discover (like most creditors) monitors credit regularly via a soft credit pull (which does not count in score calculations) as part of the maintenance of the credit card account. Director Cordray likes this program so much that he urged the leaders of the nation’s top credit card companies to follow suit by making credit scores and related content freely available to their customers. Cordray stated, “I believe this initiative will benefit both providers and consumers by making people more capable of protecting themselves, more able to benefit by the opportunities that credit can create and ultimately more productive members of our economy.” Cordray added, “Indeed, I see no reason why this approach should not be replicated with customers across other product lines as well.” Capitol Hill is also active on the pursuit of free scores. The Secure Act, which is also known as “Stop Errors in Credit Use and Reporting Act” or S.2224, addresses this issue. This recent bill was introduced by Sen. Brian Schatz (D-HI) and is co-sponsored by Sens. Richard Blumenthal, (D-CT), Sherrod Brown (D-OH), Bernard Sanders (I-VT) and Elizabeth Warren (D-MA). The Secure Act addresses many credit reporting concerns, and includes the latest legislative attempt at providing free credit scores to consumers when they receive their free annual credit report. While this bill has very little chance of becoming law in the limited Congressional calendar that is remaining prior to the midterm election in November, it will still influence other legislation attempts and could be used to influence future rule-making. Since the power players in Washington, D.C. believe free credit scores are important to consumers, let’s go back to my less than popular position of them potentially being harmful. There are three elements to my position. The first element asks the question, which score does the consumer see? Please don’t respond “all of them,” as that would be very confusing. There are dozens of versions of the FICO score, the Vantage Score (the score jointly owned and developed by the three national credit bureaus), multiple industry specific scores developed by non-FICO/Vantage analytical companies, and then the “FAKO” scores (industry slang for the FICO knock off educational scores), totaling an estimated 70-plus score possibility. Additionally, remember that this total needs to be multiplied by three, as each score is going to vary based on the different data sets in each of the three national credit bureaus. All of this means that there is a very, very slim chance the consumer will even see the actual score model that would be used by the next creditor they apply to for the underwriting of a credit transaction. With that in mind, what is achieved by viewing a score that is likely to be irrelevant? The second element asks the question, once the consumer sees a credit score, do they understand what that score means and what action steps they can take if they don’t agree? Who will explain this to the consumer? This is a concern, as a consumer can look at their credit report and know if accounts belong to them, were paid as being reported, or if there is something on the file that does not belong to them. They can file a dispute on any incorrect information with a federal law and the CFPB complaint hotline to back their rights in the process. Conversely, scoring algorithms are proprietary intellectual property of the model developer and the consumer is powerless in the decision about which model is used and if they agree with the score logic. That’s why it’s so important for consumers to make sure they get the free copy of their credit report at www.annualcreditreport.com and review it annually for accuracy. The third elements asks … what happens when a consumer has had credit problems in the past, has worked hard to pay their bills on time, and then receives a score, finds that it is low, and becomes discouraged about looking into the actual credit information in their file? This, in my opinion, holds the most potential for harm. Perhaps some of their previous credit problems are not being accurately reported. Perhaps they have a mixed credit file with a similar named consumer which is holding their score down. Both of these occurrences are not unusual and can be devastating to a consumer’s credit score. Since the score is a reflection of the data being reported, any impediment to the consumer actually looking into the details of their credit history could be harmful. The last thing we want to do is discourage a consumer who is making an effort to keep and maintain a clean credit history. The bottom line is, while any added incentives to increase the number of consumers who take advantage of the free annual credit report is helpful, the score is not as important as the data from which the score is calculated. Consumers need to regularly check their credit report and carefully look at the data to make sure that it is reporting all of their payments accurately. A history of on-time payments accurately reported in the credit history is far more important than whatever score model they could obtain. As long as the data is accurate, whatever score model is used will be an accurate forecast of the consumer’s credit risk. Terry W. Clemans is executive director of the National Consumer Reporting Association (NCRA). He may be reached by phone at (630) 539-1525 or e-mail [email protected] This article orignally appeared in the May 2014 edition of National Mortgage Professional Magazine.