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As High Scores Vanish, Borrowers’ Luck Runs Out

As banks tighten their lending standards, one number is playing an increasingly critical role in determining the financial fortunes of consumers: the credit score.

Lenders use them to decide whether to extend credit and at what interest rate. As lenders demand higher scores, more Americans are having trouble getting loans.

Others aren’t getting loans at all because their scores have dropped. They may have lost their jobs and not kept up with credit card and mortgage payments, or in some cases card companies have taken adverse actions against them. Eager to mitigate risks, card issuers have closed accounts or slashed credit lines, leaving customers with less available credit. Customers who have used up much of their credit then are closer to maxed out, which further hurts their scores.

To add to their crisis, people who try to take matters in hand and pay to find out their credit scores discover that it can be difficult to learn the score that lenders actually use to evaluate them.

"Credit scores have taken on a new degree of importance," said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, an industry group. "In the past it was a question of ‘What will your interest rate be?’, and now it’s ‘Will you even get a loan?’ "

As a result, credit is less available to both low-risk and high-risk consumers at a time when they — and the economy — need it the most.

"The consumer who desperately needs credit right now is in a very bad situation," said John Ulzheimer, president of consumer education for Credit.com. "The consumer who is remaining consistent, the market is passing them by . . . You have more cars sitting on car lots and you have houses with for sale signs."

Jane Graver is one of those desperate consumers. She once had a credit score of about 700, which before the credit crunch made her a desirable candidate for a loan. Most lenders use the FICO score, which runs on a scale of 300 to 850.

Faced with a divorce, serious illness and tough economy, Graver, a small-business owner, missed a few credit card payments and used up her home-equity line of credit. She was close to being maxed out. Last year, her score dropped to the mid-500s.

Now that lenders are demanding credit scores of 720 or higher, she is considered even more of a risk and cannot get a mortgage — or even find a landlord willing to rent her a home. Her house in Orange, N.J., sold at a price high enough to cover her mortgage and line of credit, but she is struggling with what to do next.

"It is difficult to cope," said the mother of two. "I am absolutely unable to get a mortgage."

As scores become increasingly important, they have also become increasingly perplexing. Consumers have free access to the credit reports used to determine their scores, but they have to pay to check them. With the heightened interest, many borrowers have been doing just that, buying their scores from a variety of Web sites, only to find out that they might be different from the ones lenders use, according to bank officials and consumer advocates.

"One of the things consumers have to understand about scores is that there are a number of different scores within the marketplace," said Norm Magnuson, vice president of public affairs at the Consumer Data Industry Association, a trade group.

The FICO score, which was developed by a company formerly known as Fair Isaac, is the dominant player in the industry. It is calculated based on the information contained in credit reports, which list a consumer’s debts and payment history. Three bureaus — TransUnion, Experian and Equifax — keep those credit reports.

However, to compete with the FICO score, the three bureaus united in 2006 to create VantageScore, which ranges from 501 to 990, which they sell to lenders.

Complicating matters is that Experian and TransUnion have developed their own scores, which the agencies call educational scores because they are intended to help consumers gauge their own creditworthiness. Lenders cannot even buy Experian’s score. They can buy TransUnion’s but tend to go with the FICO score instead.

On its Web site, FreeCreditReport.com, Experian gives people their Plus score if they pay $14.95 a month for a credit-monitoring service, which they can cancel after a seven-day trial period. They have to dig through the terms and conditions before getting to this disclosure: "The PLUS Score is not a so-called FICO score, and may differ for a variety of reasons."

TransUnion also offers a $14.95-a-month credit-monitoring service with a 30-day trial period on TrueCredit.com. That gives consumers access to the bureau’s scores. Like Experian, TransUnion discloses on its Web site that its score is not the same as a FICO score.

Equifax gives FICO scores to anyone who pays $14.95 a month for its credit-monitoring service.

Susan Henson, a spokeswoman for Experian, said the educational scores are still a good tool for consumers even if they are not what lenders use.

"The most important thing is they’re really measuring the same thing, which is that consumer’s level of risk, whether they are an extremely low-risk consumer or whether they are a high-risk consumer," she said.

But some consumer advocates say the educational scores are of little use and too expensive.

Ulzheimer likens them to faux designer bags. "It’s like selling a Gucci bag on the streets of New York," he said. It looks like the real thing, but it’s not.

"It exposes something two of the three bureaus don’t want people to know," he added. "They make a whole lot of money selling scores."

Indeed, the recession has been a boon for many of the Web sites that sell credit scores. Traffic on FreeCreditReport.com, for instance, grew 6 percent, to 6.6 million visitors, in March, according to ComScore, which tracks Web sites.

Sean Craig, a retail manager in Ashburn, was one Experian customer. When he first checked a few months ago, his Experian score was 720. Then American Express lowered his Blue Cash card limit to $5,900 from $11,300. His score dropped to 683, then to 681. When he called American Express to ask why his limit had been reduced, he was told he had too much debt and that his credit score was actually 570.

Craig assumed the Experian score was the one American Express used, but American Express was looking at his FICO score.

"I was shocked when I checked and it was 683. I was even more shocked when I saw it was 570," Craig said. "It’s driving me nuts. The whole thing seems utterly arbitrary."

Such big gaps between the educational scores and the FICO scores are not unusual.

"It’s a real problem," said Evan Hendricks, author of "Credit Scores and Credit Reports" and editor of Privacy Times. "People are trying to be good, intelligent, educated consumers. They want to see their score, their report. Then they get a ‘fake-o’ score, which is most likely inflated, while the lender is using the FICO score . . . People think they’re better off than they are."

Adding to the confusion is that even FICO scores can vary. That’s because the company regularly updates the formula it sells to credit bureaus. The lenders can choose to buy the new or an older version of the formula, and they sometimes settle on an older version if it is cheaper and easier. "The lenders using scores from an older version, they’re not using bad scores," said Craig Watts, a spokesman for FICO. "They’re still doing the job but not doing it quite as well as the newer version."

Watts recommends getting FICO scores at Equifax.com or myFICO.com.

Other credit score experts said a better gauge of a consumer’s financial health is the credit report. If they have paid bills on time, have no negative public records such as bankruptcies, and have used less than 30 percent of available credit, they probably have a good score, Magnuson said.

It’s clear that’s no longer the case for many Americans.

The average TransUnion credit score was 651 in the first quarter of this year, the same as it was the fourth quarter of 2008. But that was a six-point drop from the previous quarter. Experian reported a 5-point drop in the VantageScore, from 751 in the fourth quarter of 2007 to 746 in the fourth quarter of 2008.

Equifax, however, reported an increase in average scores from May 2008 to this past May, from 699.8 to 701.9, which officials attributed to three factors. First, credit card issuers are taking on fewer new customers so there aren’t as many inquiries on consumers’ credit reports. Many inquiries hurt scores. Consumers are holding on to cards they have had for a long time, which helps scores. Lastly, more Americans are saving and not using credit.

Lower scores leave people such as Graver in a precarious position. She is struggling to make her online specialty tea business, DuckyLife.com, a success. To do so, she might need a loan someday, and she probably won’t qualify. But her most immediate worry is a home. To Graver, having a lower credit score is "a nightmare."

I’ve "survived four life-threatening illnesses, six surgeries, divorce — and all as a single mom," she said. "Now I cannot find a place to live."

By Nancy Trejos
Washington Post Staff Writer
Sunday, June 21, 2009

You probably already know how an inaccurate credit score can cause you problems — but what about your “identity score”?

Though most consumers aren’t familiar with this type of rating, it’s increasingly being used by everyone from car dealers and banks to utilities and wireless service providers. Much as a credit score attempts to put a number on how good someone is at paying their bills, an identity score measures the risk that a consumer isn’t who they say they are.

Companies that sell ID scores say their products serve as a weapon to combat that fraud by helping to predict the likelihood of identity theft, which by some estimates cost consumers and businesses $48 billion last year. Already, such scores are used before most credit-card transactions or loan applications are approved — and their use is expected to spread. Thanks to new regulations, most businesses will soon be required to use ID scores or some other type of methodology to confirm a customer’s identity.

But the growing use of identity scoring is raising some questions, too. Some privacy advocates say the expansion of efforts to compile incredibly detailed consumer dossiers is troubling. Others say the scope of identity theft has been exaggerated — in terms of losses to both businesses and consumers. And then there’s the issue of accuracy: If some of the data used to calculate a score are wrong — due to errors in one’s credit report, for example — the score will be wrong as well.

A bad identity score — justly or not — is likely to create a number of issues for consumers, ranging from the inconvenience of having to answer some annoying questions when applying for credit to having important purchases or bank transfers slowed or put on hold for a matter of days while thorough ID verification takes place.

Companies that calculate and sell these scores say they’re beneficial to businesses and consumers alike. As for privacy concerns, they say that consumers’ personal information is never sold or shared with third parties. Some also say identity scores measure identity risk much more accurately than credit scores measure credit risk.

“Credit scores and identity scores should not be viewed with the same lens,” says Thomas Oscherwitz, chief privacy officer at San Diego-based ID Analytics, one of the companies that provide identity scores. “They have different purposes and are calculated differently.” Heather Grover, senior director of product management at Experian’s fraud and identity solutions group, says that consumers can make sure their identity score is accurate by disputing any erroneous information in their credit reports.

While nowhere near as big as the market for credit scores, ID scoring is becoming a fast-growing field. Players include FICO, which offers its Falcon product for scoring credit-card transactions; Experian’s Precise ID, which is used to determine the fraud risk of new account applications; and ID Analytics’sID score, which is sold to companies directly and through partnerships with credit bureaus Equifax and TransUnion. It’s an industry estimated at $1 billion a year — just from the credit-card issuers alone, according to Brian Riley, research director at financial services research firm TowerGroup.

Thanks to federal regulations scheduled to take effect Aug. 1, that market is only expected to grow. This so-called Red Flags rule will require any business that conducts transactions or extends payment terms to consumers (such as lawyers, retailers or telecom outfits) to have a system in place to identify and resolve red flags that a transaction or application is fraudulent, says Oscherwitz of ID Analytics who helped draft the rules five years ago as a staffer at the Senate Judiciary Subcommittee on Terrorism, Technology and Homeland Security.

Identity scores are calculated based on how certain personal information, such as your name, Social Security number, address, birth date or phone number, is used in transactions or for credit applications. For instance, your score might be higher — signifying a higher risk — if you move around a lot. Other factors that can raise your score, according to companies that calculate them: changing your name (say, after getting married) or living in an apartment building, where many people share the same street address. Even using an out-of-state cellphone number when applying for a car loan can boost your score.

If a score is deemed too high, an account application or transaction gets flagged. As a result, the consumer may be asked seemingly random “challenge” questions. They’re meant to be questions that fraudsters are unlikely to be able to answer — but in some cases, they can tax the memory of the authentic consumer. You might be asked the house number where you lived seven years ago, for instance, or the color of the car you owned in college or the issuer of the mortgage on your first home. Further up the inconvenience scale, you might even be asked to visit a bank branch to show your personal identification or to fax information to prove your identity.

And then, of course, there’s the faulty information to contend with. David Szwak, a consumer credit attorney and partner at Bodenheimer Jones Szwak & Winchell in Shreveport, La., calls it the “garbage in – garbage out” problem. Some of the data used to calculate your identity score come from the “above the line” part of your credit report – which often contains errors.

“Almost every single report that I have seen has personal identification information that does not belong to that consumer,” says Szwak. “There are typographical errors, just plain old inaccurate addresses, multiple Social Security numbers on file.”

The result: Between 5% and 20% of applications for credit are flagged and less than 1% end up being fraudulent, says Andy Smith, a former vice president of business analytics at the fraud department of Capital One, the big credit-card issuer.

Smith says he often runs into such problems himself. “My last name is Smith, my father and brother’s names are David,” he explains. While trying to transfer a large amount of funds between trading accounts, he was unable to answer the questions correctly and was kicked out of the system for manual review. The transfer was delayed by three days.

While many consumers are likely to be unaware of the world of identity scores, some companies want to change that. ID Analytics, which says its ID Score is used by some of the biggest banks in the country, as well as major wireless service providers, is now making the score available to consumers at no charge through MyIDScore.com.

ID Analytics says consumers can use the score to assess their personal risk that their identity may have been stolen. But the company gets something out of it too: More information for its own database. In order to get the score, consumers must enter their name, address, phone number, date of birth. (Social Security numbers are by request, but providing it is optional.) The result is a three-digit number between 1 and 999 — lower is better — that assesses the level of risk that you’ve been a victim.

Mari Frank, a Laguna Niguel, Calif.-based attorney who specializes in privacy rights and identity theft, says consumers should be aware they’re sharing sensitive personal information in order to get their score, which the company can then use to improve its products, according to its privacy policy.

CEO Bruce Hansen says ID Analytics may use the information to improve its web site, but does not plan to use it in product development. The company also says consumers can opt out, though the instructions – which require sending an email – are buried in the privacy policy’s fine print. ID Analytics says it is working on adding an opt-out option next to the fill-in form within the next month.

And much like the use of credit scores and reports has expanded dramatically over the years, from lenders to insurers and even employers, the potential for identity authentication and scoring is unlimited. Smith, the former Capital One exec, is now building a similar model that predicts instances of insurance fraud. “Stopping fraud is not that hard,” he says. “Stopping it without dropping a whole bunch of inconvenience on your customers is the trick.”

Published June 19, 2009

If you have a credit card, you’ll benefit from some changes required by the recently passed Credit Card Accountability, Responsibility and Disclosure Act, also referred to as the Credit CARD Act.

What if you have a USAA credit card? USAA never used many of the practices targeted by this legislation, such as double-cycle billing, charging fees to make payments, offering subprime cards with high fees or imposing dramatic rate increases on existing balances. "So the law won’t impact USAA cardholders the way it will other bank cardholders," says David Bohne, president of USAA Federal Savings Bank.

"As a member-focused company, we’re committed to serving our members responsibly. In fact, we supported many provisions of the Credit CARD Act because they will protect consumers from onerous practices," explains Bohne.

The new law will require USAA to make some changes before it takes effect early next year. "But we’re well ahead of the rest of the industry when it comes to fair credit card practices," Bohne notes. Here are seven provisions of the new law and what they mean to USAA cardholders.

1. More Time to Pay Monthly Bills

Today: Some credit card companies send their monthly statements less than 21 days before the payment-due date. Then, if a payment is received one day late, they charge you a late fee and increase your annual percentage rates, or APR.

In the future: Card companies will be required to mail monthly statements at least 21 days before the payment is due.

For USAA cardholders: We already mail statements at least 21 days before the payment due date. Plus, if you miss your payment due date by a few days, we don’t treat it as late.

2. Same Due Date Each Month

Today: The payment due date can change each month. Your payment can be due on the 15th one month and on the 10th the next month. In fact, some credit card issuers have different due dates based on whether or not you pay your balance in full that month.

In the future: The payment due date on each statement will have to be on the same day each month.

For USAA Cardholders: The payment due dates on our statements are always 25 days after the billing date. However, since billing dates change based on the length of each month and weekends and holidays, payment due dates can vary each month by one or two days. USAA will need to make system changes so that payment due dates can be the same each month.

3. More Information about Minimum Payments

Today: Credit card statements display the minimum required payment but don’t tell you how long it will take to pay off your balance if you pay only the minimum payment.

In the future: Credit card statements will show how long it would take to pay off the balance making only minimum monthly payments and options for paying off balances in 36 months.

For USAA cardholders: We are in the process of redesigning our monthly statements to comply with the new law.

4. More Restrictions for Exceeding Credit Limits

Today: Some credit card issuers charge an over-the-limit fee each time you exceed your credit limit.

In the future: Before you can be charged an over-the-limit fee, you’ll need to "opt-in" or give your card issuer permission to complete transactions that will exceed your credit limit. If you sign up, you can still be charged for exceeding your limit. If you don’t sign up and make a charge that puts you over your limit, the card issuer may or may not decline the transaction. But either way, you can’t be charged an over-the-limit fee if you don’t sign up.

For USAA cardholders: We currently don’t charge over-the-limit fees for customers eligible for USAA membership.

5. More Favorable Terms For Paying Off Balances with Higher Interest Rates

Today: For accounts with different interest rates — such as cash advances, purchases or balance transfers — your payments typically go toward paying off balances with the lowest interest rates first.

In the future: Payments in excess of the minimum amount will be required to pay off balances with the highest interest rates first.

For USAA cardholders: Consistent with current industry practice, we apply credit payments toward balances with the lowest interest rates first. We are in the process of updating our payment policies.

6. Prohibition on Increasing the Interest Rates on Existing Balances

Today: Even when you’ve made all monthly payments on the account on time, some credit card issuers may increase interest rates on existing balances due to a change in your credit score, income or other factors.

In the future: Card issuers generally won’t be allowed to increase rates on existing balances but will be allowed to increase rates for future purchases after the first year. A penalty rate can’t go into effect unless you don’t make a required payment within 60 days of its due date. In that case, you’ll need to be given a 45-day notice that tells you why your rate was increased. The penalty rate must be decreased to the original rate after six months in a row of timely payments.

For USAA cardholders: We occasionally review interest rates for all members. Historically, we’ve avoided the types of dramatic rate increases that prompted the new law.

7. More Notice Before Rates Can Be Increased on Future Balances

Today: Some credit cards offer low, introductory rates that can become dramatically higher over time. In addition, some card issuers have increased their rates for certain consumers without much warning.

In the future: Rates can’t be increased during the first year after your account is opened. After the first year, you’ll have to be given at least 45 days’ notice before your rate can be increased. Plus, you’ll have the ability to close your account and maintain your current rate.

For USAA cardholders: In the past 25 years, we’ve rarely raised rates. When we have, we’ve provided at least 30 days’ notice and permitted members to reject the rate increase by closing the account.

Posted on Jun 12, 2009

NEW YORK (Reuters) – Visa Inc (V.N: Quote, Profile, Research, Stock Buzz), the world’s largest payment network, said on Tuesday that U.S. legislation curbing certain practices by credit card companies would force the industry to restructure as revenue expectations shrink.

"It’s going to cause the whole industry to rethink itself," Visa’s Chief Executive Joseph Saunders said in an interview. "It will result in less credit being offered to less people."

The bill, due to go into effect in February 2010, will restrict the ability of credit card issuers’ to raise interest rates on cardholders’ existing balances, to charge certain fees, and to impose penalties on consumers that the government deemed unreasonable.

Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz), Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz), JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz), American Express Co (AXP.N: Quote, Profile, Research, Stock Buzz), Capital One Financial Corp (COF.N: Quote, Profile, Research, Stock Buzz), and Discover Financial Services (DFS.N: Quote, Profile, Research, Stock Buzz) have over 80 percent of the U.S. credit card industry.

The companies enjoyed hefty gains in recent years due to an explosion in credit, but now they are losing billions as debt-burdened Americans lose their jobs and default on credit card payments.

Americans owed more than $945 billion in credit card debt in March. And even though that has declined from $962 billion in December, credit card indebtedness is still up about 25 percent over a decade ago.

Visa is partially insulated from the global credit crisis because it processes transactions rather than lending funds. However, its revenue growth has slowed along with transaction volume as consumers try to reduce their indebtedness.

Saunders said any slowdown in credit card use would be offset by a secular change from cash and checks to electronic payments, and by increased use of debit cards. He said debit cards represented "a significant part of the company’s future".

Spending on debit cards surpassed credit volume in the United States in the first three months of 2009 for the first time in history.

Saunders said Visa does not expect to change its earnings or revenue forecast due to the legislation.

"It doesn’t look like we are going to fall off a cliff. It isn’t a tsunami. It is going to be an issue that we are going to have to deal with," he said.

"I don’t think it is going to particularly change our guidance or our notion of where we are going. Of course, if things never changed we would have had more transactions, but I don’t think that this does anything to slowdown the momentum of the change."

Visa expects annual net revenue growth of high single digits in 2009 and of between 11 to 15 percent in 2010. It also forecast annual adjusted diluted Class A common stock earnings per share will grow over 20 percent.

SLOW ECONOMIC RECOVERY

Saunders said he saw some signs of economic improvement in the United States, particularly stronger consumer confidence. but he said he did not expect a speedy recovery. He said the economy would be more solid in the first half of 2010.

"People are not doing things that they have normally done because they are concerned about employment, they are concerned about if they are prepared in the event that something happens," Saunders said, but added that "at some point in time, people will want to enjoy things they enjoyed in the past."

Visa posted better-than-expected quarterly earnings in April as the processing network company increased prices, slashed expenses and consumers used debit cards more.

However, Saunders reiterated Visa’s net income will come under pressure in the current quarter, as the company faces shrinking cross-border transactions, and a stronger dollar hurts revenue overseas.

Earnings should start to improve by the second half of 2009, as foreign exchange headwinds ease.

The company could also benefit as JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) is expected to shift part of its huge Washington Mutual debit card portfolio to Visa’s network from MasterCard Inc (MA.N: Quote, Profile, Research, Stock Buzz).

"I think that as a result of this our debit card business will grow," Saunders said.

(Reporting by Juan Lagorio; Editing by Toni Reinhold, Bernard Orr)
Tue Jun 2, 2009 9:27pm EDT
By Juan Lagorio

Yonkers, NY — Everyone knows that if you hit another car, your auto insurer will probably raise your premiums. But Consumer Reports warns that even drivers who have spotless driving records and have never had an at-fault accident may be faced with higher premiums if they run into a new breed of credit score used by insurers.

Known as credit-based insurance scores, these numbers are computed from bill-paying and loan data collected by the major credit bureaus. They have become as important in determining annual premiums as driving records and neighborhoods.

Consumer Reports’ investigation found that scores and their uses vary among insurers and that credit-based insurance scoring could cost many drivers hundreds of extra dollars.

Credit scores used by insurance companies weigh credit data differently from traditional lender scores. As a result, insurance scores can penalize even those consumers who use credit reasonably.

No standards; Little disclosure

Few insurers routinely disclose scores or what role they play in setting premiums. Consumer Reports sought and obtained scoring models filed with regulators in Florida, Michigan, and Texas used by 9 of the 10 largest U.S. auto insurers. CR found that there are no standards. Each company uses different models and weighs different credit-report information. Some big companies find scoring useful only for new customers, not renewals, while others may use it for both. Moreover, CR notes that the credit data from which the scores are derived have a reputation for being inaccurate and out of date. Despite such problems, most states allow insurance scoring, and efforts to limit or ban it have been met with aggressive lobbying by insurers.

Advocates from Consumers Union, the publisher of Consumer Reports, have been urging legislators and regulators in several states to ban the use of credit scoring to underwrite homeowners and auto insurances policies. Those efforts have met with opposition from insurers. This year, insurance industry lobbyists helped to squelch legislation to end credit scoring in Colorado, Delaware, and Minnesota. More information about Consumers Union’s advocacy position on the issue is available here.

TEST CASE: Scoring can cost the same driver hundreds extra

To see how insurance scores affect premiums, CR worked with an actuary to calculate premiums charged by preferred/standard-risk companies run by eight of the largest U.S. insurers operating in Florida. The actuary calculated a “neutral” score for a 28-year-old single man with a clean driving record in Orlando, FL who owns a 2005 Toyota Camry LE. With a neutral score, the hypothetical customer would pay roughly the same annual premium at Nationwide and GEICO, about $1,150. But with the worst possible insurance scores, the premium would increase 29 percent to $1,468 at GEICO and 47 percent to $1,706 at Nationwide.

How to polish your score to get a lower premium

Consumer Reports’ analysis shows that consumers can take steps to protect themselves when applying for a car-insurance policy:

Shop harder than ever before: Because each insurer calculates scores differently, only by getting quotes from several insurers are consumers sure to find a low rate.

Use credit that insurers favor: Scoring models prefer oil-company credit cards. They also like national bank credit cards such as American Express, Discover, MasterCard, and Visa.

Ask about your score: Farmers and Progressive both give details but only if asked.

Ask for exceptions: Progressive says that is may rescore you if your score has been adversely affected by divorce, Hurricanes Katrina or Rita, job loss, the death of a family member , or serious medical problems.

CONTACT: Alberto Rojas (914) 378-2434 or Lauren Hackett (914) 378-2561
July 29, 2006