|
 
To learn how to improve your credit score, see the video presentation by Fair
Isaac.
Report excerpt taken from, (Credit Score Accuracy and Implications for
Consumers), December 17, 2002, Consumer Federation of America, National Credit
Reporting Association. Credit histories, in one form or another, have long been
an important factor in decisions to extend or deny credit to consumers?.
Historically, such decisions required a skilled, human evaluation of the
information in an applicant's credit history to determine the likelihood that
the applicant would repay a future loan in a timely manner. More recently,
computer models have been developed to perform such evaluations. These models
produce numerical credit scores that function as a shorthand version of an
applicant's credit history to facilitate quick credit assessments.
During the second half of the 1990s, mortgage underwriting increasingly
incorporated credit scores and other automated evaluations of credit histories.
As of 1999, approximately sixty to seventy percent of all mortgages were
underwritten using an automated evaluation of credit, and the share was rising.
The automated quantification of the information in credit reports has not simply
been used to decide whether or not to extend credit, but has also been used to
set prices and terms for mortgages and other consumer credit. In certain cases,
even very small differences in scores can result in substantially higher
interest rates, and less favorable loan terms on new loans. Credit scores are
also used to determine the cost of private mortgage insurance, which protects
the lender, not the consumer, from loss, but is required on mortgages with down
payments of less than twenty percent? Lenders also review credit histories
and/or credit scores to evaluate existing credit accounts, and use the
information when deciding to change credit limits, interest rates, or other
terms on those accounts.
 In
addition to lenders, potential landlords and employers may review credit
histories and/or credit scores. Landlords may do so to determine if potential
tenants are likely to pay their rent in a timely manner. Employers may review
this information during a hiring process, especially for positions where
employees are responsible for handling large sums of money. Utility providers,
home telephone, and cell phone service providers also may request a credit
report or credit score to decide whether or not to offer service to consumers.
Insurance companies have also begun using credit scores and similar insurance
scores that are derived from the same credit histories when underwriting
consumer applications for new insurance and renewals of existing policies.
Credit information has been used as a basis to raise premiums, deny coverage for
new customers, and deny renewals of existing customers even in the absence of
other risk factors, such as moving violations or accidents. Some providers claim
that credit scores are also used to offer insurance coverage to consumers who
have previously been denied, or to lower insurance rates. This is a highly
contested issue that is under review in dozens of state legislatures and
insurance commissions.
Thus, a consumer's credit record and corresponding credit score can determine
access and pricing for the most fundamental financial and consumer services.
1 Klein, Daniel. 2001. Credit Information Reporting. Why Free Speech is Vital to
Social Accountability
and Consumer Opportunity. The Independent Review. Volume V, number 3.
2 Straka, John. 2000. A Shift in the Mortgage Landscape: the 1990s Move to
Automated Credit
Evaluations. Journal of Housing Research. Volume 11, Issue 2.
3 Harney, Ken. August 18, 2002. ?Risk-based pricing brings a big rate hike for
some.? Washington Post.
For more information:
www.myfico.com,
www.consumerfed.org,
and
www.ftc.gov
Click
to return to previous page
|
