Do Credit-Score Services
Pay Off for Borrowers?

Nov. 28, 2002 -- Consumers have more access than ever to individual credit data and analysis. But does it really help?

When Ed Cheever, a 38-year-old investment adviser in Albany, Ore., decided to refinance the $350,000 home he bought with his wife in 2000, he thought the process would be simple. Since he had a background in finance and a relative in the mortgage business to give advice, he opted to find the new mortgage on his own. With a successful history of self-employment and high income, he thought he could secure a better interest rate by raising his credit score. (A credit score is a number used by lenders to determine an individual's credit-worthiness -- the higher your score, the lower your risk to lenders.)

Like a growing number of mortgage seekers, Mr. Cheever decided to order his personal credit reports before he began shopping for a mortgage. In July, he ordered reports from TransUnion, Experian and Equifax, the three bureaus that collect raw data about an individual's credit history and financial behavior. He also signed up for a service called "Score Power" from Fair, Isaac & Co. Inc., a San Francisco-based firm that uses bureau data to create what's known as a FICO (for Fair, Isaac & Co. Inc.) score. The Score Power service includes tips on improving a score and allows consumers to model the impact of such changes as paying more or less on certain balances or closing various lines of credit could have on this number.

Mr. Cheever modeled the changes using the Score Power service and then took steps to improve his FICO score. While the changes were a good idea in theory, miscommunication between a former lender and the credit bureaus resulted in a score worse than the one he was trying to repair. He'd asked a lender to notify the bureaus that an account had been closed -- a detail that can affect a credit score since access to and the size of open credit lines is measured. But somehow the bureaus deleted the existence of the account from his record altogether, effectively erasing a positive, though closed, portion of his credit history. His score consequently dropped as it appeared now that he had a less "seasoned" credit history. "Now, I can't get it put back on the reports," he says.

Mr. Cheever says much of his credit-improvement campaign involved undoing the resulting damage. "I've spent several months repairing things," he says. At times, he felt as if he could have avoided the mistakes had he not spent more than $100 to gather and use data to tinker with his score.

Mr. Cheever eventually did raise his score. But that happened as a result of time passing, which added a few more months of history to some of his newer credit lines. He also was able to get a new mortgage at a 6.15% interest rate, versus his original 8%. He finalized the mortgage in November, but says he believes he could have gotten a better deal if he hadn't spent so much time fussing over his credit report, score and bureau negotiations.

"This was a several-month debacle," he says. Mr. Cheever's original credit score of 674 is healthy by many lenders' standards, but he'd sought to improve it so he could qualify for a mortgage that wouldn't require a large cash down payment. (FICO scores range from 300 to 800.) In the end, he had to opt for a conventional mortgage with a large cash down payment after all. "Fortunately, I had the ability to use a conventional product and the cash to get a good rate," he says. "I'm ending up in a good position."

More Data -- But Is It Helpful?

Stories like Mr. Cheever's are common, according to Ginny Ferguson, president of Heritage Valley Mortgage in Pleasanton, Calif.

"We've got more tools today than we've ever had," she says. "More consumers are aware of what their score is. But sometimes the information they've gleaned from the news or online isn't accurate." Often, consumers who visit her company's offices misinterpret good advice or follow bad advice, she says. "If anything, they sometimes do things that send their score in the wrong direction."

Ms. Ferguson says there are numerous scoring services on the market and they can be confusing for consumers. Scores are only one variable among dozens that a lender reviews, including income, job stability, gross earnings and savings.

"[A score] isn't the be-all and end-all. It's just one piece of the puzzle," she says. "We do a lot of counseling about what not to do. If the score is over 680, for instance, why fiddle with minutiae to see if it will improve?" According to Fair, Isaac, consumers with 650 or higher scores tend to have considerably lower delinquency rates than those with lower FICO scores.

Still, for some home shoppers, the nascent credit-data market can help. Some lenders and mortgage companies may work with home shoppers to help them improve their scores. "We can help them create a better picture for themselves," Ms. Ferguson says. That, in turn, helps them get a better mortgage.

Consumers have had access to their credit reports for decades, but actually viewing the same number that a lender uses is a relatively new phenomenon. Fair, Isaac's FICO score is used by many lenders but has been available to consumers only recently. The company sells a data package that includes data from all three bureaus and the FICO score, with tips on improving it, directly from its Web site (www.myfico.com). It also sells the service through a partnership with Equifax and TransUnion.

Much of the confusion over improving credit scores is due to the fact that many different organizations create scores. Some are available only to lenders, while some can be accessed by consumers. These numbers can change by the month, week or day as new data come in from creditors.

Generally, there are four types of scores. One kind is generated by credit bureaus and distributed to lenders and creditors; consumers can't see or buy these scores. Fair, Isaac generates its FICO score using data from all three bureaus and distributes it to lenders, creditors and interested consumers. Credit bureaus themselves generate consumer-only scores for consumers to use as benchmarks to determine if they need to improve their scores; these numbers may differ from scores the bureaus give to lenders. A fourth type of score is generated by independent resellers like TrueLink, CreditXpert, and Experian's Scorecard and sold to consumers.

With the exception of FICO numbers, the vast majority of scores sold to consumers aren't calculated using the same methodology as the scores sold to lenders. This means consumers working on improving their scores could be manipulating accounts to improve a number that a lender won't even see -- and could, in the process, actually harm the number that lenders use to determine loan or credit eligibility.

Even savvy consumers, such as Mr. Cheever, who knew at least theoretically how to improve his score, can be vulnerable to bureaucratic mistakes -- and to the confusing array of score products available directly from the bureaus and other financial institutions.

"There's just so much bad information out there that's given out like candy," Mr. Cheever says.

If he had to do it all over again, he says he'd still work on improving his FICO number using Score Power data. He learned, for instance, how balances on his open credit lines affect his rating and that keeping credit lines open can sometimes be a good thing.

"I feel empowered [by] going through it," he says. "To have erroneous or bad information [on your credit report] can cost you tens of thousands of dollars."

For the credit bureaus and credit-data industry, such consumer fear is worth tens of millions.

-- Ms. Hodges is a free-lance writer in Seattle.

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