The New Credit Score Rules

Forbes

If you only read one article about credit scores this year, read this one.

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The average credit score nationwide is 666, according to CreditKarma.com. That's not only an ominous number, but can be a costly one.

Based on CreditKarma.com's data, the trend amongst lenders shows that a 660 credit score is the threshold to be approved for a mortgage, auto loan and unsecured credit card. Digging deeper into consumers' credit health, nearly 40% of consumers have a credit score below 660. That means 4 out of 10 Americans would likely be denied for a mortgage and auto loan, charged sky-high interest rates, and only qualify for a secured credit card.

With credit scores controlling consumers' access to credit and the prices they pay for lending products, Americans must take control of their credit health.

In the fine line between approval and denial in lending, consumers deserve to know more so they can do more about their credit health. While recent federal regulations have nudged open the door on consumers' access to credit, it's not enough. Consumers must be empowered to actively manage their credit, not just when they are transacting but also in their daily financial life.

As legislation and economic changes evolve the credit industry, consumers' access to credit scores must be broadened. Here's what you need to know about credit now.

1. It's your consumer right to get a free credit score! Thanks to a recent federal regulation, consumers who are denied on a credit application or receive higher interests due to their credit profile are entitled to see their credit score for free. This only applies to declined consumers, so it begs the question: why aren't all consumers getting their credit score for free? With such significant impact on accessing and pricing of financial products, free credit score access should be a right of all consumers. We may see government efforts to provide free credit score access on the horizon. Once a mysterious and proprietary secret of the credit industry, credit scores are becoming a powerful tool in the hands of consumers.

2. Standards for accessing credit are always in motion. Once upon a time, the general "good" credit score standard was 660. During the recession's credit crunch, the standard jumped to 720. It appears some credit card issuers are again expanding their credit standards and approving lower credit tiers. Some mortgage lenders say a 720 credit score is needed to get the best mortgage rate, while others say 750 is the new standard. Additionally, lenders are increasingly focusing on other credit details aside from your three digit score. For example, a consumer can have a 780 credit score, considered in the excellent range, and be denied on a credit card application because their credit history is simply not long enough. It'll take time and economic stability till lenders comfortably agree on credit score standards; hopefully that keeps you on your toes and improving credit health everyday.

3. It's not enough to check your credit score. One drawback of the federal regulation is its limitations. Giving consumers access to their credit after being denied is too little, too late. Credit scores can fluctuate suddenly, so a single snapshot isn't enough. What's necessary is for consumers to monitor their credit. Whether you have a 550 or an 800, tracking trends in your credit use and credit score helps identify areas to improve, habits to avoid, and most importantly, makes you conscious of how day-to-day financial decisions impacts your credit health. You might need several months' cushion to polish up your score, so begin monitoring your credit as soon as you plan to buy a home or car, or apply for a loan or credit card. If you aren't applying for credit but currently have a credit card, it's still imperative to stay on top of your credit health. Issuers periodically do an account review, and if any new credit blemishes appear, it could affect your card terms. Proactively use credit score monitoring services so you, and not lenders, are the first to know about recent changes on your credit.

4. Expect credit score differences. The federal regulation also shined light on the fact that there are dozens of credit score models in use. While many consumers consider FICO to be the "real" score and everything else to be a "FAKO", the truth is that every lender chooses differently: there are the credit bureau-specific models, the VantageScore, the FICO score, scores specific to lender type like mortgage, auto and credit card issuers, and even models particular to certain banks. If your TransUnion score and VantageScore have a 40 point difference, there isn't a "more accurate" score. It's similar to weighing yourself at home versus the gym or the doctor's office; the scales show different numbers because they're calibrated differently, but ultimately, they all measure your weight. Rather than obsessing over the three-digit score, focus on the risk factors involved such as your debt, number of accounts, and credit use. Just like diet and exercise will reflect in your weight across all scales, taking action to holistically improve your credit health will reflect across the broad spectrum of credit score models.

While the recent federal regulation is a positive move for consumers, lenders have already found loopholes, reports SmartMoney. For example, if the lender uses its own scoring model, they aren't required to disclose that credit score to consumers. Also, insurance companies, which also use a credit score model to evaluate customers and price premiums, are excluded from this regulation and aren't required to disclose credit scores to consumers who are charged a higher premium.

As the Consumer Financial Protection Bureau stretches its reach and more financial reform finds its legs, consumers must keep challenging Uncle Sam to keep the heat on the financial industry when it comes to credit score access. Consumers must also keep putting in the legwork to build healthy credit and keep an eye on their credit score.

We're headed in the right direction when it comes to consumers' access to their credit score. But don't walk away from this topic just yet; we barely have our foot in the door.

Justine Rivero is the Credit Advisor for CreditKarma.com.

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