In a big policy shift, two of the three major credit bureaus say they will begin revealing credit scores to consumers early next year, and the third is likely to do so as well.
The impetus is a California law taking effect next July 1 that will require all credit bureaus and lenders to divulge scores to Californians. Sen. Charles E. Schumer, D-N.Y., has introduced similar legislation at a national level, so it is possible that rules similar to California's may apply across the land.
Fair, Isaac & Co., which supplies the mathematical formulas that companies use to derive credit scores, has always argued that revealing credit scores to the public would compromise its proprietary methodology. But the California law and mounting pressure from advocacy groups have prompted the company to reverse itself. It now takes the position that people are entitled to know their scores, and the credit bureaus and lenders that rely on Fair, Isaac's methodology are taking the same view.
Until now, the idea of giving consumers their credit scores has been anathema. Indeed, in April, Equifax Inc., one of the bureaus that will be selling scores directly to consumers, chastised a company that had been doing so. E-Loan Inc., which operates an online lending marketplace, had been giving consumers their credit scores so they could make better-informed credit decisions, but the practice violated Fair, Isaac policy. When Equifax found out what E-Loan was doing, it cut off its data flow to E-Loan.
Equifax Inc. and Trans Union Corp. plan next year to begin offering low-fee services that will provide consumers the three-digit credit scores that lenders use to determine creditworthiness. Experian Information Solutions Inc. says it will comply with the California law, but has not yet determined how. Once people know their scores and how to interpret them, industry experts say, they will have a clearer idea of what types of loans they can get.
Clark Walter, a spokesman for Trans Union, said, "The better informed consumers are, the better they are able to manage their credit and financial health." The Chicago-based bureau plans to make available within the first half of next year a credit score that is similar to a Fair, Isaac score, but uses Trans Union's own mathematical modeling, Mr. Walter said.
Until the new policies from Trans Union and Equifax take effect, it will still be very difficult for consumers to find out their credit scores. Now, only those who are turned down for credit are entitled to know their scores, and even then the three-digit number is relatively meaningless to most people. In November, anticipating the policy shift, Fair, Isaac started a Web site that, for $8, offers interpretations of credit scores and how they were derived: they type in their score - which, like college SAT scores, are typically between 300 and 800 - and find out the national risk percentile into which it falls.
Fair, Isaac, of San Rafael, Calif., says it bases its scores on several factors, including track record for paying back loans, outstanding debt, and total credit line. It had not wanted the scores revealed to people for fear of compromising its proprietary formulas, and, until a year or two ago, there had been little public interest in the credit scoring process. But because of the California law, the credit industry "sees the writing on the wall," said Craig Watts, a spokesman for Fair, Isaac. Its customers - lenders and credit bureaus - will no longer have to promise in writing that they will not divulge credit scores.
Because it only provides the formula, Fair, Isaac will not be required by the California law to make credit scores available to consumers (the bureaus maintain the credit files). Mr. Watts said his company does not mind revealing the scores as long as it is done right.
"If only the score is disclosed, we don't support that - that could cause mischief," he said. "The score should be delivered to the consumer with the credit report and what that means and how the consumer could improve the score over time."
The credit bureaus say they intend to take the guesswork out of the equation. In addition to divulging scores, they plan to set up online and phone-in assistance.
"We believe it's our obligation not only to disclose the score, but for consumers to understand it," said Steven Hebel, vice president and general manager of consumer information services at Equifax. The company plans to make Fico scores available to consumers in early 2001, for a fee yet to be determined.
The California law stipulates that state residents can get their credit scores free from lenders when they apply for mortgages.
The score will also be available to consumers when they buy or obtain their credit reports. Though Equifax will be giving out straight Fico scores, Trans Union says it will use its own adaptation of those scores because "there is a lot of ambiguity" with the Fico formula, Mr. Walter said. Trans Union's credit score, he said, will be "very understandable, in plain English, and there will be an explanation attached for consumers."
Ron Kingston, a lobbyist for the California Association of Realtors, which co-sponsored the bill that California enacted, suggested that the law may have spurred lenders and credit bureaus to develop alternatives to Fair, Isaac's credit-score formula. In addition to Trans Union, he said, Fannie Mae, Bank of America Corp., and Experian plan to take their own proprietary formulas into the marketplace.
Disclosing the Fico score itself is not a requirement by the lenders or the bureaus, Mr. Kingston said. "Fico could be here today, gone tomorrow," he said.
Donald Girard, director for public relations for Experian, of Orange, Calif., said his company has not decided which formula to use - its own, Fico, or a hybrid. Mr. Girard said his company will comply with the California law but that it has not determined what its policy will be for the rest of the country. An announcement is expected next quarter, he said.
Experian has not ruled anything out but believes "it's not enough to release a number to the populace at large," Mr. Girard said. "It's got to be accompanied by a comprehensive consumer education program."
Mr. Hebel of Equifax said 80% of respondents in a recent survey by his company said they were aware of credit scores, but only 11% said they were aware of how scores were formulated and what their significance was.
Lenders say they have seen a recent groundswell of interest in credit scores, perhaps because of Internet security concerns and the potential for identity theft. A thief who lays hands on a consumer's Social Security number can take out loans in that person's name and degrade their creditworthiness.
Sen. Schumer's bill, which he plans to reintroduce in Congress next year, has language similar to that of the California law. Bradley Tusk, a spokesman for Sen. Schumer, said the bureaus' change of policy is welcome, but federal law is still needed. "It's great that the California legislation is having a positive effect, but it doesn't mandate that these bureaus do it anywhere else," he said. "It's a policy, and a policy can change. A law is very different."
Sam Pincich, an executive in the regulatory affairs department of America's Community Bankers, said ACB supports the idea of giving consumers information, but said credit scoring is only one element of the underwriting process. He questioned whether lenders should be responsible for releasing the scores. "I'm not sure lenders are equipped to explain how credit scores are derived," he said.
"Someone with a weak credit score might very well be accepted for a home mortgage loan if they had a high down payment," he said. "There are offsetting factors."
Mr. Pincich said the banking industry would favor a law along the lines of the one Sen. Schumer has proposed if it follows a "proven and tested industry model. Some of the proposals made to date are less than perfect, so there should be further hearings."
Jeff Blyskal, a financial writer for Consumer Reports who recently wrote an article about the secrecy behind credit scores, characterized their inaccessibility to consumers as "playing a game and you don't know what the score is on the playing field. People don't know how they're being judged, and are making decisions out of ignorance."
For example, consumers might think they are trying to clean up their credit rating by getting rid of extra credit cards and consolidating their debt on one or two cards. But lenders and credit bureaus have in the past characterized that as "manipulating" their credit rating, Mr. Blyskal said. Credit bureaus maintain that such a practice raises a consumer's ratio of debt to credit available and thus moves him or her closer to being maxed out.
Mr. Blyskal said that accepting instant credit from a department store is "like holding plutonium," because "lenders are looking at you long-term, but instant credit works against that."