AUSTIN, Texas -
American consumers are not educated about how their credit score is calculated, which gives CUs an opportunity to educate and differentiate.
That was the message from Galli Davis, financial consultant and founder of Galli Davis Seminars in Lubbock, Texas. Davis told attendees of an educational session at the Texas CU League's annual meeting here a recent survey by the Consumer Federation of America and Fair Isaac Corp. found 49% of 1,013 consumers do not understand credit scores measure credit risk.
According to Davis, a credit score is a "very useful" tool for lenders. He said it is an indicator as to the chance a consumer will be delinquent in the next 24 months. What many people do not realize, he continued, is a FICO score ignores demographic information such as race, national origin, religion, gender and marital status, any employment information including salary, title and history, the interest rate being charged on a consumer's loans, and participation in credit counseling.
"Credit unions need to educate their members," he declared. "Make sure they know their rights and how to get their free credit score. Help them improve their credit score-this is what makes credit unions different from banks."
CUs should direct their members to one of two websites to obtain their credit report without charge once per year: www.myfico.com or www.annualcreditreport.com. He warned the oft-advertised www.freecreditreport.com is not free.
Davis said a financial fitness study found of CU members with credit scores below 620 who received credit reporting education and counseling, two in three improved their scores by an average of 36 points one year later.
"If a credit union helps people raise their credit score, and therefore qualify for better loan rates, those people will love their credit union for life," said Davis.
The FICO score has five components: payment history (35%), capacity (30%), length of history (15%), types of credit (10%) and new credit (10%).
Among the suggestions for improving scores Davis said CUs should pass along to their members:
* Never close a long-standing account, as this hurts capacity.
* Do not ask a lender to lower the limit on a revolving account (credit card).
* Avoid a low level of "percent available" both on individual revolving accounts and total revolving accounts.
* Do not open more than one new account in one quarter.
* Try to balance credit cards, mortgages and consumer accounts, but do not open new credit accounts simply for balancing.
* Avoid loans from "second tier" finance companies.
Another Davis tip: parents should add their children to their credit card accounts at a young age. This enables the child to have an established credit history by the time he or she reaches adulthood.
In addition, he said bad debt more than seven years old should be left alone. "If someone gets a pang of conscience and makes a payment, it restarts the clock and makes it a derogatory for seven more years."
The three credit bureaus, Equifax, Experian and TransUnion, pay Fair Isaac for the FICO scoring model. Davis said last year the three bureaus attempted to release a competitor to the FICO score: VantageScore. The credit companies advertised the new score as offering less score variability, more scores on consumers with limited histories, and greater transparency.
Initially, Wall Street was impressed. When VantageScore went live April 3, 2006, Davis said Fair Isaac's stock price dropped 6.6%.
"The problem is, it hasn't gone anywhere since its introduction," he said. After a poll of the room found no users of VantageScore, Davis said, "It has been on the market for a year, and I don't know any entity-bank, credit union or other-that is using it. And in May 2006, Fair Isaac sued the credit agencies for unfair practices. The case is currently pending."
