Learning The Score

If you have a financial life, you have a grade, and everybody knows it but you. For years the credit-reporting industry has been reducing consumers' credit reports to numerical scores, and lenders have been using these scores to decide whether to approve loans and how much to charge for them. The credit industry says the scores make lenders more impartial and efficient, but consumers couldn't see their scores unless they begged a sympathetic lender to spill the beans.

The scores mean serious money, and so does the secrecy. The difference between a high and low score can mean eight percentage points, or almost $5,000 in added interest payments on a five-year, $15,000 car loan, estimates E-Loan's CEO, Chris Larsen. Consumers waste more than $100 million every year in interest on overpriced loans aimed at less qualified borrowers because they don't know their own scores, says Sen. Charles E. Schumer (Democrat of New York).

Now, the industry is about to throw open its grade book, albeit grudgingly. A new California law says the credit scorers will have to be ready to provide consumers with their own grades by July 1, 2001, but pressure from Congress and a variety of consumer and lending groups may make national disclosure a reality in the next few months. Fair, Isaac & Co., the San Rafael, Calif., company that invented the mathematical formulas used in credit scoring and that produces the most widely used, eponymous FICO score, took a first step last week by explaining the scores to lenders, so they could then convey them to customers. The firm plans to make individual scores available to consumers by year-end through Equifax and Experian, two of the Big Three credit-reporting bureaus that license its software. The third, TransUnion, is readying its own scores for release.

These scores are more important than ever. The FICO is used to determine consumer creditworthiness for about 80 percent of all mortgages, as well as in car loans, credit cards and even some insurance policies and apartment-rental contracts. It's a three-digit number, ranging from about 350 to 900, that each credit bureau constructs for itself by plugging consumer-credit-report data into the Fair, Isaac software. Equifax calls its score Beacon, TransUnion uses Empirica and Experian calls its score Experian/ Fair, Isaac. Six out of 10 consumers have scores topping 700; anything below that can cause problems.

It's not just the numbers, but the secret formula that produces them that counts. Not wanting to give away the keys to its profit center, and worried that informed consumers will try to manipulate the system, Fair, Isaac has worked to keep its black box a secret. "They act like it's a matter of national security," says Greg Fisher, a mortgage broker who got so disgusted with scoring's clandestine power that he created a comprehensive Web site, creditscoring.com, to shed light on the subject.

Now that Fair, Isaac is starting to shed its own light, there are almost as many questions raised as answered. The firm has revealed its list of some 30 factors that go into the scores, but much of the information remains vague. For example, the firm discloses that the number of credit cards held will affect a borrower's score, but does not reveal how many cards are the right number. Other factors that can hurt a score include the presence of new credit cards and the absence of car loans.