By Leah Fletcher
Special for the SUN
If you ask most people what a credit score is, they can’t tell you. And, they generally know a lender will use their credit scores to determine whether to approve a loan and at what interest rate. However, they don’t always know what their credit scores are.
Recent federal changes to credit scoring regulations have opened the door to consumer credit access. In the process, handling credit is important when consumers make major purchases and in the conduct of their daily lives. And, when applying for credit, consumers deserve to know the difference between being approved or denied. The expanded knowledge will allow them to maintain their credit health.
Credit scores generally range from 300 to 850, with anything below 620 considered a poor score. The average national credit score is 660, according to CreditKarma.com. And, based on recent research data, consumers’ credit health may be considered failing, with nearly 40 percent of them registering credit scores below 660. This translates into four out of six Americans, most likely not qualifying for a mortgage, auto loan or credit card, and being charged very high interest rates.
This is what experts believe consumers should know under the new credit scoring regulations:
A free credit score is every consumer’s right.
Due to the federal regulations, consumers who are denied on a credit application or receive higher interest rates, due to their credit profile, are entitled to see their credit score for free. This only applies to those who are declined. Some might argue the costs and pricing of financial products should entitle all consumers to a free credit score. In the future, government efforts may result in free credit score access.
Standards for accessing credit are always in transition
At one time a “good” credit score was considered 660. During the credit crunch, precipitated by the recession, the standard rose to 720. Some credit card issuers are beginning to expand credit standards and approve lower credit levels. Some mortgage lenders believe a 720 credit score is needed to get the best mortgage rate, while others believe 750 is the new standard. Additionally, lenders are increasingly focusing on other credit details like the length of credit history.
It’s not enough to check your credit score
The new federal regulations do come with limitations. Providing consumers access to their credit after being denied is too little too late. Credit scores can and do fluctuate. Tracking trends in credit use and credit score may help consumers identify areas to improve and habits to avoid. Some might require weeks or months to clean up their credit scores. So, it is a good idea to monitor their credit before they plan to buy a house or a car, or apply for a loan or credit card. Credit card issuers periodically perform an account review, and if any new credit issues appear, it could affect their card terms. Credit score monitoring services also might be helpful so consumers and not their lenders are the first to know about recent changes in their credit.
Expect credit score differences
The federal regulation also revealed that there are dozens of credit score models being used. While many consumers consider FICO to be the “real” score, the truth is that every lender chooses differently. There are credit-bureau specific models, the Vantage Score, the FICO score, scores specific to lender type like mortgage, auto and credit card issuers, and even models peculiar to certain banks. The scores may reveal different numbers, but ultimately they all measure credit scores. Experts advise consumers to focus on the risk factors involved such as debt, number of accounts, and credit use. They believe taking action to improve credit health will reflect across the broad spectrum of credit score models.
Despite the improvements prompted by federal regulations, lenders have already found loopholes, reports SmartMoney. For example, if lenders use their own scoring models, they are not required to disclose those credit scores to consumers. Also insurance companies, which use a credit score model to evaluate customers and price premiums, are excluded from this regulation and are not required to disclose credit scores to consumers who are charged a higher premium.
As financial reform continues, experts advise consumers to keep the pressure on Uncle Sam and the financial industry. Consumers, they say, must also remain vigilant building healthy credit and keeping their eyes on their credit scores.