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The Growing Importance of Credit Scores and How to Improve Your Score — Consumer access to credit, housing, insurance, basic utility services, and even employment, is increasingly determined by centralized records of credit history and automated interpretations of those records. To learn how to improve your credit score, see the video presentation by Fair Isaac.

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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


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