The Mechanics of Credit Scores
Credit scoring has played a prominent role in making consumer credit accessible
to the not-so-rich. In the U.S., most credit scoring systems rank everyone
on a scale from 400 to 850 points. Where you are on the scale can affect a
lot about your life.
According to Your Credit Card Companies, a lobbying group of financial services
companies that includes the card issuers MasterCard, Discover and Capital
One:
[Between the early 1970s and early 2000s], access to credit cards has
increased 36 percent for lower-income families and 65 percent for middle-income
families. The percentage of minority families with credit cards has more
than doubled, from 25 percent in 1983 to 54 percent in 2001.
But exactly how do rigid credit scores lead to a more democratic credit system?
The answer has to do with two concepts: Risk and trust.
Credit scores help lenders make decisions about what people are risks…and
which people they will trust with loans. Consulting companies like Fair, Isaac
& Co. help lenders make credit scoring decisions based on information
held—and constantly updated—by credit bureaus.
Throughout this book we refer to the “big three” U.S. credit
bureaus—Equifax, Experian and TransUnion. These companies control
the U.S. consumer credit scoring industry. Their importance to the financial
services industry…and your ability to borrow money…is large
and growing.
Like most smaller credit bureaus, the big three keep files that include personal
information like Social Security numbers and account information of individual
consumers.
But their clients are not the people whose information they keep; their clients
are the banks and consumer finance companies who decide whether—and
on what terms—to lend money to those individuals.
The Fair Credit Reporting Act (FCRA) is an attempt by the U.S. government
to restore some balance and accountability to the credit rating industry.
According to the Federal Trade Commission (FTC):
The FCRA is designed to promote accuracy, fairness and privacy of information
in the files of every “consumer reporting agency” (CRA). Most
CRAs are credit bureaus that gather and sell information about you—such
as if you pay your bills on time or have filed bankruptcy—to creditors,
employers, landlords and other businesses.
You must be told if information in your file has been used against
you. Anyone who uses information from a CRA to take action against you—such
as denying an application for credit, insurance or employment—must
tell you, and give you the name, address and phone number of the CRA that
provided the consumer report.
You can find out what is in your file. At your request, a CRA must give you
the information in your file, and a list of everyone who has requested it
recently. There is no charge for the report if a person has taken action against
you because of information supplied by the CRA, if you request the report
within 60 days of receiving notice of the action. You also are entitled to
one free report every 12 months upon request if you certify that:
- you are unemployed and plan to seek employment within 60 days;
- you are on welfare; or
- your report is inaccurate due to ID theft or other fraud.
Otherwise, a CRA can charge you for a copy of your credit report (though
that’s changing).
Access to your file is limited. A CRA may provide information about you only
to people with a need recognized by the FCRA—usually to consider an
application with a creditor, insurer, employer, landlord or other business.
Next: History of
Credit Scoring |
