Imagine this hypothetical situation. You walk into a retail outlet and load up your cart with hundreds of dollars of sporting equipment. Clubs, shoes, balls, bats, tees and glasses are all on your shopping list. You stroll up to the register and the cashier asks you if you'd like to save 10% on your purchases. Your bill is almost $700 and saving $70 sounds like a no-brainer. The downside is you have to apply for a store credit card.

This should be a slam dunk thanks to your truly elite credit. In fact, you know for certain that your FICO scores are all above 800. All the retailer needs to do is see that 816 and you're certain that confetti and balloons will soon fall from the sky, as she takes 10% off your bill, of course. However, to your shock and dismay, the polite young lady behind the counter informs you that you've been denied because of your credit.

Here's where the fun really begins. Thanks to the FACS Act and FinReg, you will eventually be entitled to see the score that the lender used to deny you. I mean, adverse action is adverse action, right? You were denied because of your score, which was apparently way too high for the lender. The letter comes a few days later and confirms what you already knew. Your 816 was the culprit.

Why exactly were you denied? You haven't missed a payment in, well, never. Your debt is practically non-existent. You've done all of the things we've taught you and have earned great scores. Well, what not too many folks know is that scores are a great indicator of profitability as well as payment risk. Stratospheric scores, while they look great on a credit report, don't mean you'll be a profitable customer. In fact, the exact opposite is true in many cases. The lender could actually lose money on you because you tend to pay in full each month and rarely use your credit cards.

A lawsuit was filed recently by a retailer against their finance partner because the partner maintained that they needed to deny applicants with FICO scores above 800. You can read more about it here. The financier claims that anyone with scores above 800 doesn't make them enough money. The retailer claims it will cost them 25% of their customers, which means they'll lose out on the margin generated from in-store sales.

Neither party is in the wrong here. The lender is in business to make money and the retailer needs to sell stuff in order to survive. And the lender is absolutely right about the lack of revenue generated from the super-elite FICO holder. It does seem a bit odd thought that someone with FICO 500 and someone with FICO 800 would both walk out of the store empty-handed, assuming they were both depending on the in-store financing to make their purchases. If I've said it once I've said it a million times: the world of credit is not without humor.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

In 2003 the Fair Credit Reporting Act (FCRA) was modified to allow consumers free access to their credit reports. This amendment to the act is called FACTA, the Fair and Accurate Credit Transactions Act, and it did not specify credit scores. Since then consumers have been asking – no, begging – for a way to see their credit scores.

Now, thanks to Senator Mark Udall (D-CO) we will soon have the FACS Act, or the Fair Access to Credit Scores Act. Wednesday July 21 the President will sign into law what’s been commonly referred to as FinReg, or the Frank/Dodd Act. FinReg includes Sen. Udall’s FACS Act, which means there will soon be an avenue for consumers to get access to their credit scores, for free.

We’ve been talking about the FACS Act for several months now but it was always with the term “might” or “perhaps” when referring to the prospect of free scores. Now that FinReg will be signed and become law we can start talking about what this will mean for consumers. The FACS Act doesn't mean free scores for everyone. It does, however, mean that those of you who are denied anything at all based on your credit score will get that actual score. And, if you’ve been adversely approved (approved but not the deal you asked for) then you’ll also get your score for free, assuming it was the basis for the decision.

What we don’t know yet, but will soon, is exactly when this part of FinReg becomes effective. It’ll probably be at least 3-6 months before lenders have ample time to modify their adverse action systems to include the scores. That’s a reasonable amount of time. And heck, we’ve waited 21 years to see our FICO scores for free. I’m sure we can wait a few more months.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

 Not much of an intro for this little blog-lette. You asked for numbers, you got ‘em. How about these crooked lines?

7% - The average credit card utilization percentage for people who have FICO scores above 760

35% - The percentage of people who have FICO scores below 650

12,000 – The number of FDCPA and FCRA lawsuits that will be filed this year at the current pace

0% - The interest rate you could be paying on a new car (make and model will vary) if you had good enough credit

3 – The incorrect number of national credit repositories operating in the U.S. today

4 – The actual number of national credit repositories operating in the U.S. today

830 – The highest FICO score in the state of Georgia

717 – The average FICO score in the state of Wisconsin, the highest in the U.S.

18 – The age required to legally sign a contract in most cases

21 – The age required to legally sign a credit card agreement if you don’t have a job or a co-signer

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

Earlier this week FICO released data on score movement changes since the recession began. Essentially they’re the most significant score changes in nearly 2 decades.  More people score below 600 (25.5%) than ever before.  And, more importantly, more people score below 650 (35%) than ever before.  Here's my take on the data and what it means to consumers:

1. There are two reasons why scores would have migrated toward the lower end of the scoring scale; negative information hitting a credit report or a run up of credit card debt. This means that more and more consumers are feeling the hit because of credit card defaults, mortgage defaults and repossessions. And those who have lost their jobs are depending more heavily on credit cards to make ends meet.  This is bad news because it's clearly not sustainable. 


2. The news is actually worse for those who now score below 650 than those who score below 600. The percentage of people who score below 600 shouldn't be a focal point because those folks aren't even close to being approved for loans in today's credit world.  650 is a more realistic focal point and the percentage of people who now score below that score mark is 35%, which means that more than one-third of the U.S population is not credit-worthy for anything other than a subprime credit card or a subprime loan.  This is a big deal.


3. What this means is fewer people will apply for new loans because they either won't be able to afford the payments, won't get approved or won't want to pay higher rates.  


4. It also means more people will pay more for homeowner's and auto insurance because insurance companies generally use credit scores to help them set premiums.


5. More bad news: Scores this low (<650) are generally not actionable, meaning they take a very long time to improve because the negative info that's causing the lower score stays on file for 7 years. So, if we're expecting these 35% who have FICO <650 to participate in any sort of large scale economic recovery – good luck.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

Nothing drives me crazier than someone writing an article about credit scores and getting it mostly wrong.  As I’ve been saying for years now, there’s a colossal difference between a credit score "expert” and a credit score “celebrity.”  Case in point, today Yahoo publishes an article from a CBS MoneyWatch writer entitled “What Folks With Great Credit Scores Do Right.”  I’m not going to link you to the article because it’s just really, really bad.  If you choose to Google it and read it on your own, then so be it.

Ok, here’s where I get to play BP for a few minutes, meaning I’m going to try my best to clean up the mess.  I identified at least 6 major inaccuracies in the article that could lead consumers to either lower their scores or worry about things that simply don’t matter.  The list of errors is in no particular order.

Error 1 – “Your credit score can be lower when you use more than 50 percent of your available credit for each account.”

Correction – 50%?  Are you serious?  Go ahead and charge 50% of your credit limits and see what happens to your FICO scores.  You should keep your credit usage (also referred to as credit card utilization) to no more than 10% but don’t take my word for it…here’s what FICO says about it, “For FICO High Achievers, people who have a FICO score of 760 or higher, this ratio is 7%, on average.”

Error 2 – “Your credit score can be lower when you use more than 50 percent of your available credit for each account. That's because when you are close to maxing out on all of your credit limits, lenders see you as a higher risk and more likely to make late payments in the near future.

Correction – This is a continuation of the first error but it points out a lack of understanding of WHY things matter in a credit score.  The error insinuates that lenders have influence over your score and that just because they “see you as a higher risk” that your score will be lower.  That’s incorrect.  Lenders have absolutely no influence over your score other than them reporting your accounts to the credit bureaus.  The credit score developer, like FICO for example, has total control over what matters and how much.  The reason having high utilization can lower your score is because statistically it’s indicative of elevated credit risk.  There is no lender calling up FICO saying “Hey, can you make sure to give people lower scores who have high utilization?  We think they're risky.”

Error 3 – “…soft credit inquiries, which include requests made by you, an employer or by a lender who "pre-screens" or "pre-approves", have little or no impact (on your score).”

Correction – A soft inquiry has NO score impact at all, not “little” impact.  Soft inquiries also include those pesky account management/maintenance inquiries that pollute your credit report from credit card issuers with whom you have an existing relationship.  That type of inquiry is also only visible by you and not by lenders. 

Error 4 – “Also, multiple inquiries by automobile and mortgage lenders over a 30-day period count as just one inquiry, so shopping the lenders to get the best rate should not hurt your score.”

Correction – Incorrect.  I know what the writer is getting at but he’s confusing the FICO inquiry logic.  Here’s how it works; auto, mortgage and student loan inquiries do not count in your score for the first 30 days they’re on your credit file.  After they’ve been on your credit file for more than 30 days they do count BUT if there are other auto, mortgage or student loan inquiries that have occurred within the same 45-day period then those multiple inquiries only count as one in your score.

Error 5 – “Your credit score ignores your age, salary and occupation”

Correction – Your credit score does not ignore your salary.  Your salary isn’t even on your credit report so it’s not as if it’s choosing to ignore the number.  It’s like saying that your credit score ignores your level of education, the color of your hair, your weight, or your favorite football team.  If it’s not on your credit report then it’s impossible for it to be considered.  Additionally, while your job CAN be on your credit report, it usually isn't and if it is, it's usually outdated.  Mine has me as "Student", which is 19 years outdated.

Error 6 – “If you want to take action to increase your credit score, then take a look at folks with the highest credit scores. About 13 percent of folks have credit scores of 800 or higher. If you look at their credit profile, they have: debt levels at no more than 35 percent of their overall credit limits per account.”

Correction – That’s strange.  Earlier in the article 50% was the target.  Now it’s 35%.  Regardless, it’s incorrect in both places as I previously pointed out.

The point of the article was to give you an idea how to earn great scores.  This is actually very simple and doesn’t need to be so complicated.  Pay your bills on time, keep your credit card debt low (or non-existent) and shop for credit only when you need it.  That’s the formula to FICO 800.   

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.