July 24th, 2007


Blurb: However vigilant consumers will probably still want to monitor their own scores.


Credit bureaus move to improve scoring techniques


By Peter Diekmeyer • Bankrate.com


Ever fill out an application for a car loan, credit card or home mortgage? Chances are that among the first things your lender checked out, was your credit score. Although they often fall below the radar, credit scores can affect both your ability to obtain financial services and the price that you will pay for them.


Credit scores are compiled by bureaus such as TransUnion (http://www.transunion.ca/) and Equifax (http://www.equifax.com/EFX_Canada/), who then provide that information to lenders. These readings, (which are also known as “beacon scores”) measure the likeliness that a client will default on a payment for more than 90 days, during the first two years after he takes out a loan.


In today’s economy, which has been characterized by the increasingly sophisticated use of debt, credit scores are increasingly important. Yet surprisingly, the public’s understanding of how they work is notoriously thin.


“Most people don’t even know that credits scores exist,” said Stéphanie Poulin, a lawyer with Options Consommateurs, a Quebec-based consumer advocacy group. “But they are becoming increasingly used both in the financial field and by marketers of products that aren’t even necessarily directly related to lending, such as home and car insurance. That makes it ever more crucial that the data contained in credit files is correct.” 


Improvements to credits scoring

The good news is that credit bureaus are constantly improving the ways that they calculate credit scores. “In recent years, consumer borrowing patterns have changed, partly due to the increasing variety of products out there. We have been able to incorporate these changes into the way scoring is conducted,” said Careen Foster, a product manager at Fair Issac, a US-based firm which provides credit bureaus with software and other tools that are used in compiling what are known as FICO risk scores. “Furthermore, the credit histories of many consumers that are compiled in databases are getting longer, which means that a far better picture emerges of how they will pay back their debts over the long term.”


Credit scores are calculated based on a variety of factors including how a consumer pays his bills, the amount of money he currently owes, the credit he has available, his credit mix, the length of his credit history and how often he or she applies for new loans.


It is in this last area that Fair Issac has made substantial improvements to its scoring model. In the past, multiple credit inquiries would cause an applicant’s score to decline. Although any series of inquiries in any 14-day period would be counted for as a single search, this limited period did not reflect the extensive shopping that is now done by consumers, who now have far more borrowing options available than they did in the past.


For example in Canada, both mortgage brokerages and online borrowing services have become far more widespread in the five years since Fair Issac made the last major changes to the FICO scoring model. In the new versions, the inquiry filters that measure search periods have been widened to include 45 days worth of credit inquiries.


According to Derrick Breau, vice-president of marketing at TransUnion, the new refinements are good news for both borrowers and lenders. “Lenders will now have at their disposal better information to manage their risks, which in general means that they will be able to extend credit in markets that in the past they may have ignored,” says Breau. “That helps borrowers too, since many will now have access to certain products that in the past they may have been denied.”


Monitoring your own credit score

Despite the credit industry’s attempts at improving their rating methods, Options Consommateur’s Poulin remains skeptical. “These scores are basically numbers that are calculated using complex algorithms, which they will not reveal, because they say that they are trade secrets,” says Poulin. “Furthermore, many studies, conducted by sources ranging from researchers, public interest groups and so on, show that significant percentages of the data bases used in the scoring have errors in them. These errors range from loans on consumers’ files that don’t exist, or loans that have been sold to credit agencies and which are double counted and so on.”


According to Poulin, because of the FICO score’s importance in the consumption of lending and other services, consumers should consider tracking their own scores regularly to make sure that information is kept up to date. Credit bureaus are legally required to supply you with a copy of your credit report upon request. For information on how to get a free copy of the scoring from the two major agencies that operate in Canada mailed to you, you can visit the following Web-sites:


Equifax Canada






Both companies also offer services that enable you to obtain copies of your credit files online however for this they charge a small fee.


Peter Diekmeyer (www.peterdiekmeyer.com) a freelance business and economics writer.








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