You could get burned when your credit report is boiled down to one number

The problem: Most consumers are clueless about credit scores.

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"They have no clue what the score is or how it's arrived at," said Ms. Smith, vice president at Certified Mortgage Planners Inc. in Dallas, a mortgage broker. "What they do care about is what their credit shows because it does affect the score."

For years, credit scores have been veiled in secrecy – a tool used mostly by mortgage companies and credit companies to make billions of financing decisions each year.

Current law doesn't require credit bureaus to disclose a credit score with a consumer's credit report.

A credit or "risk" score is a snapshot of your credit risk picture at a particular point in time. Lenders use the score to determine how likely consumers in a specific score range are to repay their debts.

The credit-scoring process examines a consumer's credit report, assigns numerical values to specific pieces of information in the credit report – such as a consumer's payment history – puts those values through a series of mathematical calculations and produces a single number called the risk score or credit score.

There isn't one end-all, be-all credit score out there because there are many types of credit scores.

Credit bureau scores are based solely on information in consumer credit reports. Other types of scores may also include information from credit applications or bank files.

Credit scores are important because they weigh heavily on a lender's decision as to whether or not to extend credit to an applicant.

They also influence the amount of credit granted and the interest rate paid.

Credit industry officials said the scores haven't been disclosed to consumers because they're too complicated to easily understand, and consumers would be misled into thinking that they could raise their score by changing one aspect of their credit life quickly.

"The whole context of the scores would be too difficult and that's more than most consumers would care to or have any interest in grappling with," said Craig Watts, a spokesman for Fair, Isaac and Co. in San Rafael, Calif.

Credit reporting pioneer

The company pioneered the use of credit scores in the financial services industry, and lenders use its scores to make their credit decisions.

"We want to avoid confusing consumers, and we want to avoid misleading consumers into thinking they can take short-term actions to suddenly improve their credit standing with lenders," Mr. Watts said. "It's definitely more complicated than that."

But the political climate is forcing a sea change in the credit industry.

Several bills are pending in Congress that would force banks, mortgage lenders and credit bureaus to provide credit-scoring data to consumers on demand.

"I have heard the arguments against disclosure of credit scores: Consumers won't understand the score, consumers will be able to fix their scores, where does the score reside, every creditor weighs the score differently," said U.S. Rep. Chris Cannon, R-Utah, author of the proposed Fair Credit Full Disclosure Act.

"I believe that those who are making these arguments are seriously underestimating the intelligence of consumers and their level of frustration.

"Without the knowledge of what goes into the score, how can they know what they need to do to improve their credit risk?"

In California, Gov. Gray Davis recently signed into law a bill that requires lenders who obtain a credit score in connection with a mortgage to disclose the score, information about the score and how to contact the company that computed the score.

An industry leader

Credit-scoring companies also will have to correct inaccurate information in a timely manner and tell consumers what correction was made.

In an industry-leading move, Fair, Isaac has made available on its Web site (www.fairisaac.com) a comprehensive list of the factors used in calculating its scores. It's the first time the factors have been made available to the public.

Fair, Isaac also is working on making its scores available to consumers.

"It's increasingly likely that scores will be disclosed to consumers by legislative mandate or by other participants in the industry creating new scores to be disclosed to consumers," Mr. Watts said. "Since it looks like consumers will have access to scores outside of a lending context, we want consumers who get a FICO [Fair, Isaac] score outside of a lending context to get as much value from that information as possible, so we're working to make scores available to consumers in a context that will provide as much information as possible to consumers."

Gaining attention

Credit industry officials said credit scores should be released to consumers only under the condition that an explanation accompanies the number to put the score into context.

"We don't believe the goal of score disclosure is to display a confusing array of scores, scales and explanations, but rather, disclosure should foster a better general understanding of how credit scores analyze a consumer's specific file at a given point in time, giving him or her a deeper understanding of where he or she stands in the credit marketplace," said Stuart K. Pratt, vice president of government relations for the Associated Credit Bureaus in Washington, D.C., which represents credit bureaus.

Trans Union, one of the three major credit bureaus, is developing a credit score that will be offered to consumers free when they request a copy of their credit report.

The score is expected to be available before the end of the year.

Along with the credit score, Trans Union also will provide consumers with the factors influencing the rating to help them understand how to maintain or improve their credit standing.

"The timing is right for this consumer service," said Harry Gambill, Trans Union president and chief executive.

"Consumers have become empowered in their use of financial information through the Internet. Consumers' financial transactions are more effective when they can manage all aspects of their financial health."

Equifax, another credit bureau, also is working on making credit scores available to consumers.

"We're working on getting a score that can be disclosed to consumers that will be meaningful for consumers, a way of explaining that," said Dave Mooney, Equifax spokesman.

Experian, the third major credit bureau, hasn't decided whether it will release credit scores to consumers, said spokesman Rod Griffin.

"We're looking into what our options are," he said. "Whatever our decision is, it will benefit our consumers and our clients."

A good idea

It's about time that credit scores are made public because consumers should have an opportunity to correct mistakes, consumer advocates said.

"They're as inaccurate as your credit report," said Edmund Mierzwinski, consumer program director at U.S. Public Interest Research Group in Washington, D.C., a consumer advocacy group.

"If you don't know about your credit score, how do you know the mistakes in your credit report translate into your credit score?"

Credit scores are playing an increasingly larger role in consumers' lives, he said.

"Credit scores have replaced the use of credit reports in nearly every circumstance of credit-granting," Mr. Mierzwinski said. "Credit scores are easier for decision makers to read. It's a go, no-go number."

Ms. Smith said she has first-hand experience in seeing how inaccuracies in consumers' credit reports can mess up their life.

"Over 50 percent of the credit reports generated through this office have errors on them," she said.

"One young lady had her student loans duplicated and shown as active loans over 50 times instead of three to four that should have been reported. This lowered her score drastically, since it increased her total debt and total payments.

"Since lenders are so score-driven, the consumers who have legitimate errors are penalized in the interest rates they must pay when obtaining any loan."

Popular figures

Credit scores also touch other parts of consumers' financial lives.

Some insurance companies use credit scores to determine whether they will sell homeowners' or auto insurance to a consumer, Mr. Mierzwinski said.

There's a good reason for doing that, said Jerry Johns, president of Southwestern Insurance Information Service in Austin, an insurance industry trade group.

"Insurers in Texas using credit histories do so in conjunction with other underwriting tools to help identify risk characteristics because people with their financial house in order tend to have fewer losses and thus deserve lower rates," he said.

"Some might even use those for business insurance to determine whether the person has the ability to pay the premium over a longer sustained period."

If consumers want to know how to improve their credit score, it's very simple, said Mr. Watts of Fair, Isaac.

"Always pay your bills on time, keep your balances low, don't take on more credit than you need and make sure your credit report is accurate," he said.

But consumers mustn't think that a short-term change in their financial behavior will raise their credit score, Mr. Watts said.

"The score is based on long-term management," he said.

Pamela Yip covers personal finance for The Dallas Morning News. If you have a story idea, e-mail her at pyip@dallasnews.com.