Californians To Get Credit Scores

By Broderick Perkins
DeadlineNews.Com

Update: California Governor Gray Davis on Sept. 30 signed SB 1607, creating the nation's first credit-scoring law to give consumers access to their credit scores, effective July 1, 2001.

"California now has the most consumer-friendly law involving credit disclosure in America," said Senator Liz Figueroa, author of the legislation.

Californians could soon have the right to see their credit scores, a secret and questionable number lenders heavily rely upon to decide what you'll pay for a loan, if you'll be approved for a loan or if you'll be declined.

With only eight dissenting votes during the State State Legislature's overwhelming approval of SB 1607 in recent weeks, Gov. Gray Davis has the impetus to sign the nations' first credit score disclosure law.

"We are optimistic, but I want to make it clear that we have no commitments from the governor," said Alex Creel, legislative representative of the California Association of Realtors, one of the bill's staunchest lobbyists.

Originally introduced as a lender's risk management product that's also used to speed up the lending process, credit scores represent a statistical evaluation of how likely you are to default on a loan. Scores range from 300 to 800 or more and the higher the score, the lower the probability you'll default on a loan -- in theory.

Consumer advocates say you have a right to the scores because they represent telling personal credit data that don't always add up.

Old, new law

Right now, you can't get your credit scores, except under the table from some brokers and lenders who've ignored attempts to keep them secret.

If the bill becomes law, effective July 1, 2001, California lenders must hand over your credit score when you apply for a mortgage, but not other loans.

(Initial U.S. Congressional hearings for proposed federal credit scoring disclosure legislation is scheduled for this month.)

While the new state law won't force lenders to turn over your credit score for non-mortgage loans, it will permit you to obtain your credit score just as you now have a right to your credit report, for a small fee, at any time, direct from each of the three national credit bureaus, Equifax, Experian and TransUnion.

Lenders won't be obliged to explain your credit score, but the credit bureaus will have to provide a detailed explanation about the data it used to arrive at your score.

"Consumers deserve to know how lenders are evaluating their loan applications," said Gail Hillebrand, staff attorney for Consumer's Union.

Under current law, when any loan application is rejected, you have a right to see your credit report at no cost, but credit scoring has been a closely held secret shared largely by lenders and San Rafael-based Fair, Isaac and Co., which created the most widely used credit-scoring system.

Fair, Isaac recently began providing details about what goes into it's "FICO" credit scoring system, but says the actual scores belong to the credit bureaus and lenders.

The scores can do more harm than good if they are released without the context of an actual loan application, says Craig Watts, a Fair, Isaac spokesman.

Rather than requesting credit bureaus to explain the scores, that should be left to lenders' because they provide the context.

"The scores represent credit behavior. If you are aware someone is watching your behavior you might change your normal habits to reflect what you think they want to see," says Watts.

That results in "gaming" a temporary adjustment to change the lender's decision, not to change actual credit habits.

"People who have tried that are more likely to hurt their score than help it," said Watts.

Credit score game

For example, let's say you've never missed a mortgage payment, you've never been late on your credit cards and are generally considered a no-risk, A-1 credit consumer.

To make your loan application bullet-proof, you decide to improve your credit score by paying off some small balances on high-limit credit cards. You cancel those cards and shift the balance, thousands of dollars, onto fewer cards in an effort to show meaningful consolidation.

Your application is denied.

Suddenly canceling many cards with small balances and then shifting all the debt to fewer cards effectively raises the ratio of your unpaid balances to the maximum credit lines available on fewer cards.

To the bloodless credit-scoring software, it appears as if your financial situation has tightened.

The real estate industry, Consumers Union (publisher of Consumer Reports) and other bill supporters disagree. They say you have a right to know the score because when you apply for a mortgage or other loan, most lenders obtain your credit score along with your credit report, which, for better or worse, provides the basis for your credit score.

Right to know

"It's more than the consumers right to know. It's the consumers right to correct erroneous information on a credit report with penalties to the credit bureaus for failing to correct the error in a timely fashion," said Pam Foley, president of E. F. Foley & Co., Inc. a mortgage brokerage in San Jose.

Bill supporters also say, while credit scores consider other ability-to-pay information, including your income and time on the job, they rely too heavily on credit report information without accounting for nuances in credit behavior.

Your credit report may appear pristine, but you could have to pay a higher interest rate or, worse, you could be denied a loan when you score low for not having enough credit, for paying off loans too quickly or for carrying certain credit cards -- even if your credit report appears pristine.

"If someone has a department store credit but pays off the balance immediately, on the credit report it shows up as always paid on time with a zero balance and that's perceived as positive. But that could be one of the reasons your credit score is low. People who obtain store credit cards are more inclined to default on loans than those who don't," said CAR's Creel.

For more information:

  • The final version of SB 1607
  • Fair, Isaac and Co. offers a detailed explanation of credit scoring and related information.
  • Creditscoring.com is an independent Web site that has chronicled the credit scoring issue.

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