Your FICO score.
This key credit number can determine your house payment, your insurance rates, even your next job, yet you have to pay to see it. That's wrong.
By Liz Pulliam Weston
Congress did right by granting us consumers a free annual peek at our credit reports. Now lawmakers need to go one better and give us a free look at our credit scores, as well.
Knowing, understanding and monitoring our credit scores have become essential financial skills in the 21st century. That's why I wrote a whole book about them ("Your Credit Score: How to Fix, Improve, and Protect the 3-Digit Number that Shapes Your Financial Future"). People need to know how credit scores work and understand what a huge effect they can have on our financial lives.
These three-digit numbers, designed to give a snapshot of our creditworthiness, are used by:
Lenders to determine who gets credit and how much they pay. Most lenders use credit scores, and in particular the FICO scores created by Fair Isaac Corp., to help evaluate applicants and set interest rates. If your credit scores aren't good, loans can be tough to get and can cost you thousands of dollars more than they would if you had a decent score. Consumers could save $16 billion just on credit card finance charges if they raised their average score, which generally ranges between 300 and 850, by 30 points, according to Providian Financial executive J. Christopher Lewis. Mortgages, auto loans, home-equity borrowing, personal loans -- all are substantially more expensive if you have mediocre or bad credit.
Landlords, utilities and cell-phone companies to evaluate applicants. Landlords often use the score as a quick way to decide who gets available apartments. Utilities and wireless companies typically use scores to determine whether to extend service and/or require deposits. (Employers also check out applicants' credit in many cases, but tend to order whole credit reports rather than just scores.)
Insurers to set rates. Auto and home insurers often use credit-scoring formulas to help determine premiums. Insurers and independent researchers have found a strong, although still unexplained, correlation between how well people handle their credit and how likely they are to cost the insurer money. Folks with the highest credit scores tend to file the fewest claims; as credit scores deteriorate, the propensity to file claims rises. The practice is controversial (for details, read "Is your insurer discriminating against you?") but widespread; only a few states, including California and Massachusetts, prohibit insurers from using credit information.
So why aren't they free?
The fact we don't already have the right to see our scores for free comes as a surprise to many people. Three out of four consumers surveyed last year on behalf of the Consumer Federation of America and Providian Financial mistakenly believed that they could access their scores without cost.
In fact, credit bureaus and score providers charge $6 and up to view these numbers, or require consumers to sign up for often-expensive -- and unnecessary -- credit-monitoring services to get "free" scores.
What's more, the credit scores being touted often aren't the same as the FICO scores used by most lenders. Mortgage brokers and lending officers complain that the "consumer education" scores often sold by two of the bureaus, Experian and TransUnion, can be 30 to 100 points higher than the consumers' actual FICO scores.
Buying your FICOs, though, isn't cheap. The one site that provides FICOs from all three credit bureaus, MyFico.com, charges $15.95 each or $47.85 for all three.
And you really do need to know your scores at all three bureaus. These are private, competing businesses that don't typically share information, so the data in your reports -- and as a result, your scores -- are likely to be different. Mortgage lenders tend to pull all three of your scores, while other lenders might use just one bureau's scores, but you probably won't know in advance which one. That's why you need to look at all three at least occasionally, and definitely before applying for a major loan.
The bureaus, not surprisingly, dislike the idea of giving away scores for free. They didn't want to give away reports, either. What other business, they ask, is forced to give away their products?
It's your data and their profit
What the bureaus ignore is that their products consist of our personal information. We have a right to see what they're saying about us. We also have a right to know, and understand, how lenders view that information, which is what a credit score reveals.
Congress wasn't immune to the bureaus' distress, and as a sop allowed them to market scores and related products, like credit monitoring, to consumers requesting their free reports. The money the bureaus make this way is dwarfed by the amount they make selling our scores to lenders and other commercial interests, but it's substantial enough that it will take an act of Congress to pry free scores from their hands.
If you want a ballpark estimate of what your credit score might be, check out MSN Money's Credit Score Estimator. But understand that it gives only a range, and it's based on Experian's credit score formula, not FICO's. If you want to see your actual FICO scores, you still have to pay for them at MyFico.com.
The bureaus use the following statements to argue against free scores:
There are too many credit-scoring formulas to single out just one. It's true that there are hundreds of different credit-scoring formulas and even numerous variations on the FICO formula. (An auto lender, for example, may use a FICO formula that's tweaked to consider behavior with previous auto loans more heavily.) But FICO is still the dominant brand. If another scoring formula, like the much-touted but still unproven VantageScore, gains ground, then consumers can be given a choice about which scores they want to view when given their annual free look.
Furthermore, if any credit score is used to evaluate your application for credit, insurance or housing, you should have the right to see that score for free, to be told how you rank compared to others, to receive information about the major factors that influenced your score and to be given guidance on how to improve your score.
Currently only mortgage lenders are required to show you a credit score, and it doesn't even have to be the one they used to evaluate your loan application. That's nuts.
Credit scores change constantly, so one peek won't do much good. Scores are built on the information in your credit reports, which does indeed change all the time. Pay down a credit card balance and your score goes up; apply for a new account and your score goes down. But most peoples' FICO scores are relatively stable, changing less than 20 points in any three-month period, so an annual look would at least help people understand their credit ballpark.
People don't need to know their scores; they just need to handle their finances responsibly. In reality, you do need to know your scores to know if you're getting a good deal or not. Consider the auto-loan markup scandal of a few years ago: Auto dealerships were adding one to three percentage points to the interest rates of borrowers (usually minorities) who didn't realize they could qualify for better rates. Less egregious examples happen every day when borrowers don't know their scores and don't shop around. It's ignorance that costs people money, and there's an easy way to cure ignorance: Give people their FICO scores for free.
It's also a myth that good financial habits necessarily lead to good scores. Sometimes the opposite is true. For example:
Not using credit at all. Using cash and debit cards exclusively may help you manage your money, but you may not be doing your credit scores any good. If you don't have and occasionally use your credit accounts, eventually the credit-scoring formulas won't be able to generate a score for you. No score means no credit with many lenders, and more expensive loans when you can get them. (You don't have to owe balances or pay interest to have a good score, but you do have to use credit at least once in awhile.)
Closing credit accounts. It makes intuitive sense to close accounts you aren't using, but that act can ding your score. The effect can be minor if you have high scores, or quite large if your credit history is short or troubled or you close your highest-limit accounts.
Taking advantage of balance-transfer offers. Seizing a lower interest rate seems to make financial sense, but opening up new accounts and transferring balances from higher-limit cards to lower-limit cards can hurt your scores.
Chasing frequent-flier miles or other perks. Maxing out your cards every month can bring you rewards, but it can also damage your credit scores, even if you pay your balances in full every month. (Typically, the balance reported to the credit bureaus, and thus used in your scores, is the balance showing on your last statement. Even if you pay it off instantly, that payoff won't be reflected on your reports or in your scores.)
You can read more examples in "Weird stuff that hurts your credit" and find out more about how credit scores work in MSN's Decision Center on credit ratings.
The bottom line, though, is that you need to know your scores, and they're built using the information about you that's contained in credit bureau files. A once-a-year peek, plus another every time you're evaluated by a business, isn't too much to ask. Write your congressman.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.