A Consumer's Credit Score Is a Consumer’s Responsibility

Consumer credit scores remain a hot topic. An annual survey from the Consumer Federation of America and VantageScore Solutions recently prompted concerns that a large minority of consumers don't understand how credit scores work. Additionally, legislators are pushing for more transparency of scores and revisions to credit bureau reporting laws. Credit scores, however, aren't as mysterious as people think, and there isn't a need for this much attention.

According to the CFA's survey, about 40% of Americans don't know that most lenders use credit scores to determine an applicant's eligibility for a loan or credit card and what the terms will be. Yet 94% of respondents recognize that making loan payments on time helps raise credit scores. This stat indicates the majority of us have a good understanding of how credit scores work and even those in the minority know that paying your bills on time improves your credit score.

There is no secret here. Legislation is already in place to make credit score information readily available. By law, all consumers are entitled to a free credit report each year. The Dodd-Frank Act requires lenders to provide free credit scores to consumers when they are turned down for credit or don't receive the best terms available for a loan or credit card. In March, The Fair Access to Credit Scores Act of 2013 proposes making credit scores even more accessible to consumers by including a reliable, accurate credit score with the free annual credit reports.

Despite all of the transparency about the importance of credit scores and how they are calculated, confusion persists. People either aren't interested or more likely don't like to face the result of their actions. For many consumers, maintaining good credit is not worth the effort. That is their choice. You can't teach someone how credit reports work or how to use credit responsibly unless they want to learn. The bottom line is there will always be some percentage of the population who don't get it or who simply don't care.

Recently, a state senator in Montana proposed legislation to revise credit reporting laws. The bill would have restricted the lowering of a consumer credit score when multiple inquiries were made within a 45-day period and also required consumer reporting agencies to notify consumers if their score had been lowered.

Based on the bill's stipulations, I'm not certain this senator fully understands how credit scores work. Here's why: multiple inquiries are only one of the criteria used to determine credit scores and, in most cases, don't have a significant impact on scores.

Moreover, lawmakers are not the ones best positioned to mandate changes to credit scoring models. Lenders and analytics firms create models based on consumer behavior. These models are statistically derived by credit risk analysts to rank the risk of consumers. This modeling approach has proven effective for more than 40 years and continues to evolve over time to provide more precise results. Legislation that restricts model changes blocks lenders from making the most accurate credit decisions possible. Accuracy is essential to have a reasonable amount of credit available for qualified borrowers. Nobody wants to see another subprime lending crisis.  

Stephen Brobeck, executive director of CFA, told CreditCards.com regarding the survey: "Our findings are complex, but clearly identify a tough challenge facing us and other financial educators." I disagree. The industry doesn't need to invest millions in further education and legislation. Credit scores are based on an individual's financial behavior and used to calculate their risk. Their score reflects whatever decisions they make.

The road to a good credit score? Pay your bills on time, check for errors on your report occasionally, keep your oldest line of credit open when possible and don't apply for multiple lines of credit you don't need. It's really pretty straightforward.

Karen Gordon is public relations strategist for Zoot Enterprises Inc., a provider of loan origination, account acquisition and credit risk management solutions for large financial institutions. You can follow her on Twitter @karenrgordon.