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Consumer’s Fight for Truth About Credit Scores

It was in the course of those conversations that an increasing number of consumers started hearing about FICOs and credit scores. For the first time, people learned that the reason they did or didn’t get the loan they wanted was because of a three-digit number. It became obvious that lenders were putting a lot of stock in these mysterious scores.

But when consumers tried asking for more details, they often hit a brick wall. Fair Isaac, the leader in the credit-scoring world, wanted to keep the information secret. The company said it worried that consumers wouldn’t understand the nuances of credit scoring, or they would try to “game the system” if they knew more. Fair Isaac feared that its formulas would lose their predictive ability if consumers started changing their behavior to boost their scores.

Now, some sympathetic mortgage officials didn’t buy into Fair Isaac’s company line. They thought consumers deserved to know their score, and these officials also often tried to explain how the numbers were created.

Unfortunately, because Fair Isaac wouldn’t disclose the formula details, a lot of these explanations were dead wrong. Even more unfortunately, some loan officers perpetuate these myths about credit scoring, despite the fact that we have much more information about what goes into them. (You’ll read more about these myths in Chapter 5, “Credit-Scoring Myths.”)

Resentment about the secret nature of credit scores came to a head in early 2000. That’s when one of the then-new breed of Internet lenders, E-Loan, defied Fair Isaac by letting consumers view their FICO credit scores. For about a month, people could actually take a peek at their scores online and learn some rudimentary information about what the numbers meant. Some 25,000 consumers took advantage of the free service before E-Loan’s source for credit-scoring information was cut off.

But the proverbial cat was out of the bag. A few months later, with consumer advocates demanding disclosure and lawmakers drafting legislation requiring it, Fair Isaac caved. It posted the 22 factors affecting a credit score on its Web site, grouped into the five categories you’ll read about in the next chapter. Shortly after that, the company partnered with credit bureau Equifax to provide consumers with their credit scores and reports for a $12.95 fee.

In late 2003, Congress finally got around to passing a law that gave people a right to see their scores. By the time this update to the Fair Credit Reporting Act was signed into law, however, access to credit scores was almost old hat.

Consumers’ access to credit scores was further expanded in 2011, when a portion of the Dodd-Frank financial reform bill kicked in that required lenders to disclose credit scores to applicants.

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