Credit scoring: What you need to know now

I just finished reading the Consumer Financial Protection Bureau report on credit scores.  This report was published on July 19, 2011 to meet a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The Dodd-Frank Act also made amendments to the Fair Credit Reporting Act related to credit scoring that became effective on July 21, 2011.  While there is a lot of information to digest in the report and the Acts, following are some take-aways regarding credit scores that you need to know now.

  • There's more than one type of credit scoreGeneric scores are used to predict behavior for a wide range of credit products.  Industry scores are specific to one type of credit, such as vehicle loans.  Some lenders create their own custom scores and consumers might receive what is called an educational score.
  • There are many scoring models for each type of score. There are many different scoring models used by lenders.  Even FICO, responsible for 90% of generic credit scores in 2010, has numerous scoring models.  This means that the score you see may not be the same score that a lender sees.
  • Credit scores aren't the only factor considered by lenders.  Other factors that may be considered include your income and employment history. The Equal Credit Opportunity Act (ECOA) prohibits lenders from considering factors like race, gender, and nationality.
  • The definition of "good" credit changes.  While most people consider a score of 680 or more to be "good," the definition of "good" changes over time and can vary from lender to lender. Furthermore, not all scoring models use the same scale as FICO (350 to 800).  
  • You may be entitled to a free credit score.  Starting on July 21, 2011, consumers will be provided with credit scores when they (1) are granted credit with less favorable loan terms than other consumers, (2) apply for a mortgage, or (3) are subject to an adverse action such as having an account closed.
  • You are entitled to a free credit report. In accordance with the Fair and Accurate Credit Transactions Act (FACT Act), consumers are entitled to receive one free credit report every 12 months from each of the three major credit bureaus. This has been true since 2003. When you obtain a free report from the central source, the FCRA mandates that you be given the option to purchase a credit score calculated using the credit report.

Consumers may find it frustrating that they receive a score that is different then the one used by lenders.  In fact, the Consumer Financial Protection Bureau's report identifies some potential harms that may result from this, particularly if the consumer believes that they are more or less creditworthy than the lender believes them to be. 

The best thing a consumer can do is to stop focusing on a specific score, but instead concentrate on using credit responsibly and to understand the major factors that contribute to a credit score. These factors include payment history, length of credit history, new accounts, types of accounts held, available credit, and credit utilization.  

Kim McGrigg is the former Manager of Community and Media Relations for MMI.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.