Score Trap

Many consumers have learned that their credit records have been reduced to three-digit scores, and that these scores now determine the fate of most loan applications. The higher the score assigned to you by each of the three, giant repositories of credit information (Transunion, Experian, and Equifax), the loCredit scores, and how to manage your credit reportwer your presumed risk of default.

These scores, known as “FICOs” (after Fair Issac, Co., which invented the scoring software), are well-intended efforts to simplify the old-style black art practiced by loan underwriters: reading each line in an entire, ten-year credit history, and then making a subjective go, no-go decision.

Like so many computerized developments in our bright, shiny New Economy, this credit-scoring development is still developing. The current situation described below is frustrating and a little frightening, but is a rapidly evolving — and hopefully passing — horror story. There may be substantial improvements as early as year-end.

Here’s the story. If you have a high set of credit scores, terrific; you’re home free. If you have low scores, at best you and your lender will have to operate within the confines of the old debt-to-income ratio straightjacket, and at worst… no loan. (High is 720 or more; good is 720-680, okay-you’ll-get-your-loan is 680-620, a strong maybe from 620-580, and under 580… stay on good terms with your landlord.)

At really worst — the scary part — even if your low scores are based on errors in your credit report, you still won’t get your loan.

When your mortgage lender runs your report, it hires a local credit bureau to contact all three of the repositories. In the old days, like 1999, if the report showed an erroneous entry, and you could prove to the local bureau that the entry was a mistake, the local bureau would delete the error on its report, and your loan would be underwritten without damage from the error.

Meanwhile, in the old days and in the new ones, the error lives on forever at the repositories.

Enter credit scores. Your credit is scored at the repository level, not at the local bureau; and you’ll be underwritten based on scores, not a local-bureau report with errors cleaned.

How might one go about correcting repository error, and changing one’s scores?

One would tear one’s hair out trying.

The first method, “quick-scoring”, is brand new in 2000 and is being tested by consumer trial-and-error right now. You present unambiguous evidence of error — a confession by the creditor filing the erroneous report — pay thirty bucks to the local bureau, and they will get you re-scored within three days, and within thirty days remove all trace of the error from all three repositories.

Pretty good, actually. Though, by the time you collect the unimpeachable evidence and get re-scored, the house you wanted is long gone. And, only two of the repositories allow quick-scoring, though surely Equifax will be forced to behave soon.

The quick-scorer’s clean-up at the repository level may be the best benefit of the new approach. Stories told by hundreds of clients lead me to believe that direct consumer correspondence with the repositories is a waste of time: they don’t have to respond in accordance with existing statute until (1) you have ordered a consumer report directly from them and (2) sent certified mail. It takes time for the additional report, and the published addresses for the repositories are post office boxes which won’t accept certified mail. I believe these POBs are connected directly to chutes leading to local landfills.

It is productive to have a creditor confess its error directly to the repositories, which clearly open and respond to mail from creditors. However, even a creditor confession can take a month to clear an error – bye-bye new house. (Nightmare scenario: the original creditor is out of business, but before it went banko, it sold an imaginary defaulted account under your social security number to a collection agent which will try to collect until doomsday. No original creditor to confess… a permanent error.)

How much will your scores improve after an error is removed, whether by quick-score or confession?

We don’t know. The scoring formulae are secret. However, if you have only one or two isolated errors in an otherwise clean report, they should not peril a home purchase, even if uncorrected. If you have lots of authentic derogatory entries, removing a stray error won’t help your scores. If the error is a collection account showing as unpaid which was paid… correcting that “error” won’t help at all – a collection is a collection, paid or not.

The correction that helps, and sometimes a lot, is correcting a recent error: the more recent a derogatory report, the more damage it does to your scores.

Given the irresponsible behavior by the repositories, prudent, continuous monitoring of one’s own credit record is impossible. Consumers can find their FICO scores only by asking a lender to run a report – though I can’t imagine Congress will allow the repositories to maintain secrecy much longer. The only reason the repositories won’t disclose scores to consumers now is to prevent calls from all of us – trying find out who screwed up our credit scores.

One action item (besides writing to your Congressperson): at the slightest sign of a creditor confused about a payment, let alone a threat to make a negative report or to refer your account to a collection agency – REACT!

Don’t hang up on ’em, don’t throw the letter away, don’t let an error or an argument make it to your electronic record. Once embedded there… it’s too late.