Thursday, July 19, 2012
How important is my Credit Score?
The mortgage broker’s point was stark: “you are your credit score”. The observation garnered some mumbling from the crowd, but the point was clear: In the current economy where the cost of living exceeds an individual’s ability to save for a major (and necessary) purchase like housing, the only practical way for “the 99%” to acquire housing is to rent or purchase with a mortgage from a bank. However your ultimate ability to do so often comes down to a three-digit number maintained by any number of credit reporting bureaus.
A credit bureau is a private business that sells information – nothing more. The information that they sell is data reported to them by your creditors for things such as account and payment history, balances, late payments, and available credit. That information is churned through an algorithm to determine your “creditworthiness” and is expressed as a number. Depending on the agency, the scores can vary, but generally, a FICO credit score ranges between 300 and 850; a VantageScore score ranges from 501-990.
Your credit score is essentially a measure of your financial health that banks and other lenders use these scores to measure eligibility for mortgages, credit cards and a wide variety of other consumer loans. Some landlords check them to screen prospective renters, and some companies check credit reports before hiring a new employee. Low scores or problematic credit histories can mean higher interest rates or rejected applications.
Despite the importance that fair and accurate credit history reporting holds on an individual’s ability to obtain housing, employment, or other consumer loans, the various credit reporting agencies were under fairly lax legislative oversight. The Fair Credit Reporting Act required that all information contained in a report be “accurate”, but did little to specify any procedure to ensure accuracy. The FCRA primarily provides a mechanism to disclose the information contained in the report to a consumer – not to redress inaccuracies in the report itself. A consumer is entitled to a free credit report (but not a free credit score) within 60 days of any adverse action (e.g. being denied credit, or receiving substandard credit terms from a lender) taken as a result of their credit score.
However, there seems to be some change on the horizon.
In addition to the Fair Credit Reporting Act, Under the Wall Street Reform Bill passed on July 22, 2010, a consumer is entitled to receive a free credit score if they are denied a loan or insurance due to their credit score. Also, the newly-created U.S. Consumer Financial Protection Bureau (CFFB) has indicated an intention to provide additional federal oversight of credit reports in an effort to ensure accuracy, and will be able to conduct an investigation of the offending reporting agency in the event of a consumer complaint. These changes were discussed in our previous post as well: Is the Government Monitoring your Credit Report?