OCTOBER 2004

Credit Reporting Companies Poised
to Improve Consumer Knowledge of Scores

Despite recent efforts by Fair Isaac, Experian and others to broaden awareness of credit scores, a new survey released by the Consumer Federation of America has found that two-thirds of American consumers do not understand their credit scores. This news will likely provide the fuel for numerous business plans to launch new consumer-friendly reporting and monitoring products. More importantly, it may coax consumers into checking their credit reports to see what all the fuss is about – and by doing so learn that certain behavior in handling credit costs them real money.

The CFA survey was co-sponsored by Providian Financial and conducted by the Opinion Research Corporation in late July. CFA says a follow-up survey will be conducted in 2005. Results are based on a representative sample of 1,027 American adults. Among the findings:

• A minority of consumers realized that credit scores were used outside of traditional loan applications. For example, only 30% recognized that credit scores were used by utilities, 47% knew that scores were used by home insurers and 48% knew of the use by landlords.

• Only about one-third of borrowers realized that credit scores were based only on their own past payment history, as opposed to other factors such as income, age and marital status. Of course, these other factors do influence many proprietary scoring models, in contrast to the bureau-based scores, such as a borrower's FICO (a product of Fair Isaac), to which the survey referred.

• Consumers generally had no sense of what constituted a good score. About 12% of those surveyed correctly identified the low 600s as the level below which credit would be denied or carry a significantly higher interest rate. Only about 13% recognized that a score in the low 700s would qualify them for the lowest rates. CFA president Steve Brobeck remarked "It is meaningless to know your score if you don't know whether it is good or bad."

• Perhaps more troubling than the results above is the finding that many consumers do not understand how to improve their scores. For example, 40% did not know that paying off a large balance on a credit card would improve one's credit score. About a quarter of respondents incorrectly thought that using a card's full credit line would improve a credit score.

These results from the CFA/Providian coincide with results from a similar study of consumer credit score knowledge conducted by Trans Union LLC in August of this year. Trans Union surveyed 1,005 consumers and found that only about 10% knew their credit score, and only one in eight consumers knew what constituted a good score.

Against this backdrop, it is not surprising that the market is expanding for various credit report and credit score products targeted at the consumer market. An analyst with Stephens Inc. Investment Bankers told the American Banker that they estimate the market for credit monitoring products will reach $800 million annually by 2005. Media coverage of the 2005 rollout by the bureaus of free credit reports will spur consumer interest in their credit reports, and will likely lead to greater demand for monitoring services.