CONSUMER REPORTS: CREDIT
SCORES BEING HELD AGAINST CONSUMERS
**EMBARGOED
UNTIL JUNE 30TH AT 6:00PM EST**
Most
consumers know that credit scores are used to determine rates on loans,
credit cards, and insurance premiums, but credit scores can also influence
whether they get a job or apartment and how much of a security deposit is
needed to get some utilities turned on. What is more troubling is
that the formula behind this all-important number is largely a mystery and
the data on which it’s based are often inaccurate, resulting in varying
scores from the three major credit bureaus. The August issue of Consumer
Reports gives consumers a guide to fixing credit errors and five important
tips to improve credit scores and save thousands.
Contact:
Lauren Hackett, 914-378-2561, lhackett@consumer.org
CONSUMERS
REPORTS®: CREDIT SCORES BEING HELD AGAINST CONSUMERS
August
Issue Gives Five Steps to Improve Credit Scores
YONKERS, NY – Many people know that credit scores and credit reports are
used to determine rates on loans, credit cards and insurance premiums, but
the August issue of Consumer Reports warns consumers that credit histories
can also be held against them when looking for a job or apartment and even
getting the electricity turned on. What is more troubling is that
the formula behind this all-important number is largely a mystery and the
data on which it’s based are often inaccurate or out of date, resulting
in varying scores from the three major credit bureaus. The August issue of
Consumer Reports also includes five important tips to help consumers
improve credit scores and potentially save thousands.
How
the score can hurt…
The way that credit scores influence lenders and affect consumers’
pocketbooks becomes evident when looking at mortgages. For example,
a consumer with a score of 720 and above who is looking for a fixed-rate
$150,000 mortgage would get a rate of 5.55 percent (as of early June
2005.) A consumer with a score between 620 and 674 would get a rate
of 7.36%. The people with the best credit scores may pay roughly
$138,000 less than those with the worst. Like lenders, auto and home
insurers are increasingly relying on credit-based scoring. The use
of credit checks gets dicier in the hands of employers and landlords
because it could mean the difference between landing and losing a job or a
place to live. And local utilities have been using credit reports to
determine that amount a consumer has to put down as a deposit.
Dozens of large and small companies provide background screening of
applicants, which includes investigations into court and academic records.
But employers also access credit reports. The Equal Employment
Opportunity Commission calls the blanket use of credit checks potentially
discriminatory because it may disproportionately
affect some minority groups. California has
banned the use of credit-based scores in pricing auto policies, and
Maryland has banned it for homeowners insurance. Hawaii prohibits it
for both. Massachusetts and Pennsylvania have similar bills pending.
What
the score is…
The company behind the credit-score phenomenon, Fair Isaac, developed its
scoring system in 1989 to give lenders a shortcut for judging
applicants’ credit-worthiness. The three major credit bureaus
(Equifax, Experian, and TransUnion) use the system to calculate a
so-called FICO score based on the data they collect about consumers from
banks and credit-card companies. But when CR asked Fair Isaac to
explain the system, Fair Isaac said that its formula involves 22 pieces of
data and that the final figure, from 300 to 850, hinges on mathematical
models that forecast behavior. The median U.S. credit score is about 720.
How
to improve credit scores…
Consumer Reports suggests that consumers review FICO scores and credit
reports once a year, or several months before applying for a loan, to
check for errors, negative data, or any suspicious activity that may
signal identity theft. Once any errors are cleared up, to improve
scores CR suggests that consumers take the long view and consider these
five tips:
-
Sign up for automatic bill payment. Being late on bills by 30 days or more can make credit scores drop by as much as 100 points.
-
Watch the timing of your spending. For consumers who plan on applying for a loan it’s best to keep spending down and reduce debt. The lower the balance, the better the credit rating.
-
Limit credit-card applications. Each time a lender inquires to view a credit report it gets noted and can reduce the score.
-
Think twice before canceling cards. Consumers gain points if they are tapping only a small percentage of the total credit available to them. Eliminating accounts can reduce the ratio.
-
Make sure credit limits are posted. When creditors don’t report available credit the Fair Isaac’s system might assume that those cards are maxed out which can slash scores by as many as 50 points.
Consumers can visit www.ConsumerReports.org to access a free guide to
deciphering credit reports.
—
30 —
AUGUST
2005
©
Consumers Union 2005. The material above is intended for legitimate
news entities only; it may not be used for commercial or promotional
purposes. Consumer Reports® is published by Consumers Union, an expert,
independent nonprofit organization whose mission is to work for a fair,
just, and safe marketplace for all consumers and to empower consumers to
protect themselves. To achieve this mission, we test, inform, and
protect. To maintain our independence and impartiality, CU accepts
no outside advertising, no free test samples, and has no agenda other than
the interests of consumers. CU supports itself through the sale of
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noncommercial grants.
