Insurers' use of credit scoring is here to stay, Posted by Robert Paisola

Q I just received my FICO score and VantageScore ranking. My FICO score was 5 points less than my VantageScore ranking, yet FICO gave me a "good" rating and Vantage gave a "nonprime" grade D scoring. My vehicle insurance went up because of this score. Is there any way to dispute this?

A Don't I wish you could dispute your insurer's decision!

My insurer did the same thing to me while insisting I was still saving more money on my insurance than if the company didn't use scoring. Go figure.

What's really interesting about your situation is the big difference in how FICO and VantageScore rated your scores.

First, let me talk about my actuarial friends.

Insurers have the right in most states to view your credit history and include what is found there in their calculations of your personal risk.

Why? Well, insurers say — and our fearless state representatives agree — there is a correlation between how a person handles credit and the likelihood of filing an insurance claim.

So to help everyone manage the difficult situation of who gets charged what rates, or gets coverage at all, insurers rely on a scientific model.

The bottom line of the situation is that insurance credit scoring is here to stay.
You can ask the insurer's customer service why your rates went up, but you'd probably have more luck asking my cat Stinky for answers. Each company has its own scoring models and considers them to be trade secrets.

However, you can get a version of your generic insurance score from TrueCredit. You will receive an auto and homeowner's coverage score along with advice for improving your score. Insurers may not look at the information contained in your credit reports and scores in the same way that a potential lender would. For example, an insurer may be more interested in your payment history than in how much you owe.

Your FICO and VantageScore credit scores are based on the information contained in your credit reports at each of the three major credit bureaus — Experian, Equifax and TransUnion.

Because each bureau has different data in its files about you, you will have a different score depending on which type of data they use.

Although you cannot dispute your scores, you can check your credit reports to assure that the information used to calculate those scores is correct. If you find inaccurate or out-of-date information, you should file a dispute with the bureau that reported it.

VantageScore is a relative newcomer to the credit-scoring industry. It was developed by the bureaus, and they claim the VantageScore ranking is more up-to-date than a FICO score. Different math and weightings are used to figure your score, and each has its own range of scores.

FICO scores go from 350 to 850, while VantageScores range from 501 to 990 and also include a letter grade.

Once you have your credit reports in the best shape possible, your only other alternative for saving money on your insurance premiums is to shop around for different insurance carriers.

Because insurers each use their own scoring systems, you could have a much better score with carrier A than you do with carrier B, and your premium will reflect that.

Knowing the score can reduce finance charges

Knowing the score can reduce finance charges



By TERESA McUSIC
Special to the Star-Telegram
Take this quick true/false quiz.
Your credit score is influenced by:

A. Your income

B. Your age

C. Your state

D. Your ethnicity

E. Your education

If you answered true to any of these, you don't know what a credit score really is.

Low scores mean higher interest rates on everything from car loans to mortgages to credit cards. Low scores can also mean higher insurance rates, an inability to get services like cellphones, and difficulty getting a job or a place to live.

Your credit score has enormous influence on your daily life, yet a recent survey by the Consumer Federation of America and Washington Mutual reveals that most Americans still don't understand it.

"I'm surprised so many people know so little about their credit score," said Stephen Brobeck, executive director of CFA. "I expected to see an improvement of knowledge over the last couple of years."

Yet an amazing 74 percent of people surveyed thought income influenced their score. More than one-third said age, education and state of residence had some effect. Nearly 20 percent thought that ethnicity had an impact.

Wrong. Wrong. Wrong.

Let's all go back to Credit Scores 101.

Credit scores serve one purpose: They indicate your risk of not paying back what you owe.

FICO scores -- named for their creator, Fair Isaac & Co. -- range from 300 to 850. The higher your score, the better off you are with lenders, insurers, employers and landlords. Most scores fall between 600 and 700, according to Consumers Union, with higher-cost lending, called subprime lending, starting with a score of 620.

How much can that difference in cost be? FICO estimates that someone with a credit score between 760 and 850 will pay $466 less a month in interest on a 30-year, $200,000 mortgage in Texas than someone with a score of 500 to 579.

Washington Mutual estimates that $20 billion would be saved in lower credit-card charges if Americans raised their credit scores an average of 30 points.

The scores are generally made up of five different criteria. Fair Isaac breaks it down like this:

Payment history, 35 percent. This means just what it says. A long history of making payments on time leads to a better score. One or two late payments won't usually hurt, but missed payments, bankruptcies, foreclosures and liens can have a serious effect on your score.

Amounts owed, 30 percent. Owing money in itself does not trigger a low score. Your score is hurt if you are close to maxing out a credit card or if the amount you owe has jumped recently.

Length of credit history, 15 percent. It's possible to have a short history and a high score, but longer is better.

Type of credit in use, 10 percent. This portion looks at the mix of your credit, from mortgages and installment loans to credit cards and retail accounts. It's not a key factor unless there's not much other information about you.

New credit, 10 percent. Timing again plays into this part of the score, in that opening up several lines of credit in a short period can lower your score. Multiple card requests can also lower your score.

This year, the three credit bureaus introduced a new scoring system called VantageScore. Its range is 501 to 990 with accompanying letter grades from A to F.

Adding another score and range to the market complicates things for consumers, Brobeck said. But as long as you know the range, either score will give you an idea where you stand with lenders, insurers and others you want to do business with.

"If you don't know what a good score is, you can't understand if you have a good score," Brobeck said.

Getting your score generally costs about $14, although the new VantageScore is selling on Experian's Web site for $5.95.

For three years, Washington Mutual has given its customers free access to their credit scores online, said Alan Elias, senior vice president at the S&L.

"We have to pull the scores every month anyway to monitor them," he said. "And our customers can use it as a way to monitor identity theft."

Remember, credit scores can't generally be repaired overnight. But for most of us, working on some of our credit habits for six months can make a big difference.

Bottom line: if you're planning next year to buy a house or car, sign up for a credit card, cellphone or electric plan, rent an apartment or go to a job interview -- check out your score.

What's in your report?

Check your three credit reports at no cost at www.annualcreditreport.com, call 877-322-8228 or request a form at the Web site and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. You will need to give your Social Security number. The report does not include a credit score.

Source: Consumer Federation of America

HOW YOUR CREDIT SCORE AFFECTS YOU

A good credit score can save you thousands of dollars, particularly when you're borrowing money to buy a house. Here are several ranges of scores and the monthly payment on a $150,000, 30-year mortgage associated with them:

700-759: Rate: 6.52% Cost: $950

680-699: Rate: 6.7% Cost:$968

660-679: Rate: 6.91% Cost: $989

640-659: Rate: 7.34% Cost: $1,033

620-639: Rate: 7.89% Cost: $1,089

Average U.S. credit score: 678

Source: Bankrate.com

Boosting your score

There's no magic to raising your credit score. Here are the basics:

Pay bills consistently and on time.

Don't max out credit cards or other revolving credit.

Pay off debt rather than moving it around.

Don't open new accounts often.

Source: Consumer Federation of America

For Rent: Your Credit Score

For Rent: Your Credit Score
Loophole in FICO Enrages Lenders

By Martin H. BosworthConsumerAffairs.Com

June 5, 2007

Plastic Prison • Credit Tips And Tricks• Get Control of What You Owe• No Easy Way Out Of Credit Card Debt• Penalty Fees, Interest Rate Hikes, and Misleading Contracts Await Credit Card Shoppers• "Convenience Checks" Carry a Heavy Price Tag• New Forms of Credit Scoring• Understanding Credit• Credit Bureaus: Who You're Dealing With• Reading Your Credit Report• Credit Scoring: The Fickleness of FICO• Credit Knowledge: A Long, Hard, Struggle---News• For Rent: Your Credit Score• Fed Proposes Tighter Controls On Credit Card Rates• Senate Bill Would Curb Abusive Credit Card Practices• Senate Panel Slams Abusive Credit Card Practices• Congress Targets Credit Card Companies For Reform• Report Finds High Debit Card Overdraft Fees• Bank, ATM Fees Continue To Rise• Credit Card Fees Rise, Disclosure Statements Inadequate• Free Credit Reports Mark First Anniversary• Credit Card Debt Sinking Many Older Consumers• Experian Launches New Credit Score; Critics Unimpressed• Credit Cards Target Students• Credit Card Companies Fear "Perfect Storm"• Credit Bureaus Introduce New Scoring System• More Banks Using Universal Default to Hike Interest Rates

The all-important three-digit number known as your credit score has become the central pivot on which the financial industry moves.

Borrowers are repeatedly told to demonstrate good financial behavior not just for its own sake, but to ensure that their credit score stays high enough to receive approval from lenders. And a score that doesn't meet with lenders' approval can keep otherwise responsible borrowers from getting a home or car loan for years.

So it should come as no surprise that companies like InstantCreditBuilders.com (ICB) and Addatradeline.com have devised a way to game the system -- in this case, by paying people with high credit scores to let low scorers "piggyback" on their ratings and receive boosts to their own scores as a result.

The new trick takes advantage of a loophole in the credit system. People who have little or no credit histories, such as college students, can be added as an "authorized user" to credit cards that are ultimately paid for by Mom and Dad.

In this case, the "authorized user" with good credit is paid several hundred dollars to "rent" their credit score out to someone else, with the agency taking their cut from the potential piggybacker.

Lenders Object

Although the Federal Trade Commission has been taking a wait-and-see approach to the issue, the financial and mortgage industries are already on the warpath.

The National Association of Mortgage Brokers (NAMB) is planning to release a statement opposing the practice. Mortgage lenders say the practice undermines the trust lenders place in the FICO score, which is by far the most widely-used scoring system for new loan approvals.
"We have become so dependent on FICO scoring that we rely on it almost to the point that FICO is the decisionmaking process," Bremer Mortgage president Jim Miley told the Minneapolis Star-Tribune. "If we can't get assurances that FICO scores are accurate, then we will definitely go back to manual underwriting of loans, a time-consuming and expensive process."

Unforeseen Consequences

Fair Isaac, creators of the FICO score, has said that it will close the "authorized user" loophole in its credit scoring model to protect against "piggybacking." John Ulzheimer of Credit.com says that the move is going to "screw consumers royally."

"A lot of people are going to get penalized for something a few bad apples did," Ulzheimer said in an interview with ConsumerAffairs.Com. "The value of any authorized user on a credit card is now totally lost."

Ulzheimer said that anyone who has built a credit history as an additional user on a card, ranging from college students to married couples and divorcees, will have to "rush out" and open up new credit accounts to rebuild or maintain their scores and credit histories.

"It won't be as big a rush as people filing bankruptcy before the new laws took effect,"
Ulzheimer said, "But you'll see it happen."

Ulzheimer, who formerly worked at both Fair Isaac and Equifax, said companies like ICB are liable for enforcement under the Credit Repair Organizations Act (CROA), which mandates the rules that so-called "credit repair organizations" work under. "The minute they take money in advance, they're liable under CROA," he said. "This is a case of merchants ripping off businesses, and some consumers ripping off lenders."

Bad Data

FICO became dominant largely because it streamlined the formerly cumbersome and detailed process of lending down to a simple number.

Whereas local credit bureaus and mortgage lenders would previously look at a person's entire financial history and make calls based on individual judgment, the modern system relies almost totally on the proprietary algorithm developed by Fair Isaac, and based on information in credit reports that is very often inaccurate.

The ease with which credit could be approved led to an explosion of availability of lending to people who would not ordinarily have qualified, but the mania to approve credit and sell reports and scores to lenders also led to constant errors and mistakes in reports that are very difficult to correct.

Now the housing market is in the doldrums, thanks to subprime loans going into default and foreclosure accross the country. Even the Federal Reserve is reconsidering the easy access to credit that consumers have come to take for granted.

And the closing of the "authorized user" loophole won't just make building credit tougher for consumers -- it's exposed a vulnerability in the FICO score that has competitors like the credit bureau-backed VantageScore ready to pounce.

John Ulzheimer had previously criticized the new score, which is sold right from the three bureaus, as "an effort to confuse consumers and unsophisticated lenders."

Now, he said, "I wouldn't be surprised if there was an all-hands meeting at VantageScore Solutions to discuss what to do" about the loophole in the FICO score. "They're licking their chops."

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FACTBOX - FICO credit score components, from Reuters, Posted By Robert Paisola

FACTBOX - FICO credit score components

Thu May 10, 2007 5:09PM EDT

Credit scores, dominated by the Fair Isaac Corp.'s FICO system, are relative measures of a person's creditworthiness.

The scores are used by banks and other lenders to determine if a person will get a loan and how much they will pay.

Here are components of the FICO score:

-- Payment history, 35 percent of score. Late payments on credit cards, mortgages, student loans etc. will show up here and reduce the score.

-- Amounts owed, 30 percent of score. Total amount owed on a credit card compared with the total credit line. The higher the amount owed relative to the credit line, the lower the score.

-- Length of credit history, 15 percent. A short credit history will reduce the score. Experian, Equifax and TransUnion have developed VantageScore to reach more people with "thin" credit histories.

--New credit, 10 percent. The more request one makes for new credit accounts, the riskier they are perceived.

--Types of credit used, 10 percent. FICO considers the mix of credit cards, retail accounts and mortgages.

Opinions differ on effectiveness of FICO score, Posted by Robert Paisola

Opinions differ on effectiveness of FICO score

Fair Isaac says its FICO score works just fine. But rising defaults have prompted some to question whether the system has flaws.

By Thomas Lee, Star Tribune

Don't blame the messenger.

That might not be anyone's idea of a great corporate slogan, but executives at Fair Isaac Corp. are finding themselves playing defense this year about the company's most vaunted product.
As subprime mortgage defaults continue to rise, some lenders are questioning the value of Fair Isaac's FICO score, which measures a consumer's ability to pay back a loan.

"FICO scores were one of the best predictors of early defaults," said Glenn Costello, an analyst with Fitch Ratings, a credit-rating agency based in New York. "Today, that is not true."

In December, a top executive with HSBC Finance, a major subprime lender, told investors that FICO scores were "less effective or ineffective" in predicting behavior during a period of aggressive lending and low interest rates.

Defenders of the FICO score say the product works just fine. They say overaggressive lenders, hungry for profits, are more to blame for the increasing number of defaults among homeowners, because they loosened underwriting standards to take in more marginal borrowers and also sold riskier products such as adjustable-rate mortgages.

"We're confident that FICO does what it is supposed to do," said Ron Totaro, vice president of global scoring solutions for Minneapolis-based Fair Isaac. "Lenders develop their lending strategies, and they use as little or as much information as they want."

Totaro said there is "no evidence" that FICO scores are not effective when applied to borrowers who fit in the riskier subprime portion of the market.

Any perception that FICO is faulty could have serious consequences for Fair Isaac. FICO is both the company's best-known product and the most popular credit-scoring system in the United States. Last year, FICO scores generated $177.1 million in sales, about 21 percent of Fair Isaac's total revenue.

What's worse, the company has already been struggling to boost its sales. Last week Fair Isaac said second-quarter revenue fell 3.4 percent to $201 million.

FICO also faces a challenge from VantageScore, a new credit-scoring system developed and marketed by Experian, TransUnion and Equifax, the country's three top credit-reporting agencies. Fair Isaac is suing the agencies, claiming VantageScore violates antitrust laws. By jointly offering VantageScore, the agencies are in the position to shut out FICO and other competitors from the credit-scoring market, according to papers filed in U.S. District Court in Minneapolis.

VantageScore executives see the subprime fallout as an excellent chance to promote their product.

"Absolutely, it helps us," said Barrett Burns, VantageScore's chief executive. "It offers us a great opportunity for lenders to look at VantageScore. Since our score is more accurate and predictive, there would have been improvement" in mortgage defaults had the industry used VantageScore instead of FICO, he said.

A recent Fitch Ratings report seems to lend some support to Fair Isaac in the debate. Some of the industry's riskiest subprime products -- high loan-to-value mortgages, piggyback loans and others that required little or no documentation of income -- made the FICO score "less significant relative to other attributes as an early default indicator," Fitch said.

In 2003, loans that defaulted within 12 months of issuance had FICO scores that were 30 points less than loans that did not default. Last year that difference shrank to 10 points, according to Fitch.

Others say the troubles among subprime loans simply show the limitations of credit scores. Loan officers can't look to FICO scores when trying to weigh how changes in interest rates, the type of loan or sudden events could affect a borrower's ability to pay, said John Ulzheimer, president of Credit.com Educational Services, a San Francisco-based financial services company.
"The score is the score," said Ulzheimer, a former Fair Isaac manager who helped build credit-scoring models. "It doesn't take into account external factors."
For instance, Hurricane Katrina's devastation could have turned healthy FICO scores of 750 among Gulf Coast residents into 450s in a relatively short period of time, in which case "the credit scores looked like they had failed," Ulzheimer said.

Still, credit-scoring companies must do a better job in establishing consistent scores for borrowers with patchy credit, said Craig Focardi, an analyst with TowerGroup, a research and consulting firm in Needham, Mass. Credit scores below 640 fluctuate more often than scores of 700 or better, he said. Companies such as Fair Isaac also should develop credit scores that take into account additional categories of risk instead of "lumping customers into similar brackets," he said.

Fair Isaac sells a product called NextGen FICO that Focardi says better measures the credit risks posed by subprime borrowers, but mortgage lenders have been reluctant to adopt it because it costs more than a standard score. VantageScore could inject some needed competition into the business, Focardi said.

"The mortgage industry needs to reevaluate whether one score is good for all customer segments," he said.

Totaro of Fair Isaac said the company constantly updates and refines FICO scores. Asked if some subprime lenders are unhappy with the service, Totaro replied: "We have talked to numerous clients. We will work with them to show them how the FICO scores work."

Ulzheimer said lenders never liked FICO scores, especially when a low score disqualified a potential borrower from getting a loan. Most lending operations are set up so that fees are generated by granting loans, not turning people away. But in the recent housing boom, lenders just got too greedy and sold unsuitable products to consumers, he said.

"You do your best to explain how the model is built and what it can do," Ulzheimer said. "But some lenders are going to do whatever they want to do. You never hear from lenders when things are going well. But the minute the FICO score doesn't do what they want it to do, it's amazing how loud they scream."

Thomas Lee • 612-673-7744 • tlee@startribune.com

©2007 Star Tribune. All rights reserved.