Credit scores are all-important

By T.K. MALOY, UPI Deputy Business Editor  |  Dec. 17, 2002 at 5:16 PM
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WASHINGTON, Dec. 17 (UPI) -- Many Americans don't realize how much their credit score determines everything from buying a car to getting home mortgage.

As it is, an accurate credit score can be problematic enough -- depending on how you score -- but what about an inaccurate score?

According to a new study released Tuesday by the Consumer Federation of America and the National Credit Reporting Association, millions of Americans could pay more for -- or even be denied -- credit, insurance, or utilities because of inaccurate credit scores.

Research for the study, conducted during the summer of 2002, analyzed the credit scores of more than 500,000 consumers, and extensively reviewed the files of more than 1,700 individuals, maintained by the three major credit repositories -- Equifax, Experian and Trans Union.

Altogether, nearly 200 million Americans have credit files.

The analysis of the scores in 502,623 merged credit files reveals that 29 percent of these consumers had scores from different credit agencies with a range of at least 50 points from each other.

Four percent of the consumers had score ranges of at least 100 points with the different credit repositories.

"This frequent huge discrepancy in scores reveals the importance of consumers being able to quickly learn and correct inaccuracies," said J. Robert Hunter, CFA's director of insurance.

"Creditors should be required to provide to consumers, charged anything other than the best available rate or denied credit, a copy of credit reports free of charge, then to reconsider their decision based on any corrections," he said in a statement accompanying the release of the study.

What are credit scores, and why are they important?

The CFA explains that a credit score is a number, based on an analysis of information contained in a credit report, which provides an indication of how likely a person is to repay his or her debts. It is based on several types of information, including payment history, amount of debt owed, and types of credit used.

Credit scores, and the credit reports on which they are based, increasingly influence consumer access to credit, housing, insurance, basic utility services, and even employment.

The growing use of credit scores has increased the speed with which many credit decisions can be made, the potential for customized pricing of credit, and the overall efficiency of credit granting. However, in consumer lending, inaccurate scores can result in unfair treatment of borrowers who are denied or charged high prices for credit.

The study found various errors in credit scoring of either omission or commission. Common errors of omission were the failure to report a negative event -- for example, a delinquency or charge off -- or a positive event -- for example, payments on an account.

Seventy-eight percent of files were missing a revolving account in good standing while one-third of files were missing a mortgage account that had never been late.

More serious errors of commission appeared in a significant portion of files. In 43 percent of the files, reports on the same accounts conflicted in regard to how often consumers had been late by 30 days. In 29 percent of the files, there was conflicting information about how many times the consumer had been 60 days late. And in 24 percent of the files, conflicts existed about 90-day delinquencies.

Reported delinquencies have a large effect on credit scores.

"While the sample ... is too small to generalize reliably to all credit files, the frequency of errors in these files strongly suggests that errors of omission and commission exist in the credit files of millions of consumers," said Terry W. Clemans, NCRA executive director.

"Further, these errors or inconsistencies are being factored into decisions made via automated underwriting models and credit scoring systems," he said in a statement.

The study also found that mortgage purchasers were particularly at risk from inaccurate reports. For first or second mortgage loan purchasers, a score of 620 is necessary to qualify for prime loan at conventional rates. Consumers with scores below this level are likely to be charged high subprime rates or be denied the loans.

CFA and NCRA paid particular attention to at-risk consumers, which they defined as those with scores between 575 and 630 where there was at least a 30-point range between low and high credit scores, or whose high and low scores were, respectively, above and below 620.

One-fifth of all 1,704 files manually studied met these criteria and were designated as at-risk. Based on reviews of these files, the study estimated that for these consumers at least one-fifth would be harmed and one-fifth would benefit from score inaccuracy if they tried to purchase mortgage loans.

"Equal numbers of those harmed by and benefiting from inaccurate credit score are not a wash," said Stephen Brobeck, CFA executive director. "The allocation of consumer credit should not be a lottery where one has to be lucky to receive fairly priced loans," he said in a statement.

Falling below the 620 credit score cutoff point can impose significant costs on mortgage borrowers. Over the life of a 30-year, $150,000 mortgage, for example, a borrower incorrectly charged a subprime rate of 9.84 percent instead of a prime rate of 6.56 percent would pay $317,517 in interest instead of only $193,450 in interest -- a difference of $124,067 in interest payments, according to the study.

To reduce the chance of adverse actions such as being charged higher prices or being denied credit, consumers can take preventive steps, the CFA and NCRA said in the study.

First, maintain consistency in credit applications by using your full legal name.

Second, review your credit record regularly by purchasing a credit report and score from each major credit repository once a year, but especially before you apply for a mortgage loan.

Third, dispute any errors that appear on your credit report by contacting the relevant credit repository, including Equifax, Experian or Trans Union.

Fourth, if a lender tells you that you have bad credit, ask them for specifics. While currently lenders are not required to give you this information, they are permitted to, and many will.

Fifth, if you have complaints about your credit report and are unable to have them quickly resolved, contact the U.S. Federal Trade Commission.

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