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To the delight of consumer advocates, a program is in the works to not only release credit scores to consumers but demystify the process, as well.

Fair, Isaac and Co., the company that provides credit scores to lenders, and Equifax, which tallies consumer credit reports, have teamed up to provide an online credit scoring education service. The alliance between the two is aimed at helping consumers understand the three-digit score assigned to them by Fair, Isaac which is used as part of the decision process by lenders for a loan application.

While optimistically received by consumer advocates, legislators and industry experts, whether it will have a measurable impact on the industry itself is questionable.

Fair, Isaac and Equifax, and other credit reporting agencies, have increasingly come under fire by consumer advocates and legislators, most recently in a Consumer Reports article, for keeping consumers in the dark about how a credit score is created and what factors a person can alter through their own behavior to enhance the score.

Both companies said recent legislative initiatives to make scores readily available to consumers, including a California bill which becomes effective this summer, were not the only reason the program was created, but it did play a part.

“There’s been a lot of legislation and regulation proposed both at state levels and at the federal level which would force lenders to comply with laws that may not be as clear and could cause more confusion with consumers than actually taking a proactive stance to do this,” said Michael Rapaport, vice president of the data repository alliance market at Fair, Isaac.

“Starting in 1995 when the mortgage industry started embracing Fair, Isaac scores as the industry standard, it’s become more and more evident consumers want more. They want to hear more and learn more. And that’s one of the reasons why we did it. We felt this was the next step in educating consumers, as far as what lenders look at when evaluating a person’s credit standing and to provide more information to consumers about how they can improve their credit standing over time,” he said.

Fair, Isaac, however, remains concerned that credit scores alone, without suitable explanations, are not appropriate for the general consumer.

“We still believe that scores alone are not particularly useful to consumers and could potentially confuse consumers into doing inappropriate things in an attempt to improve their credit standing. That’s why we have been searching for several months to gain a credit reporting agency partner with whom we can disclose credit scores in the correct and proper way to consumers. That means in the context of additional information so that scores can be meaningful to consumers,” said Craig Watts, spokesman for Fair Isaac.

State Sen. Cheryl A. Jacques, D-Needham, an outspoken consumer advocate, has filed identity theft legislation which, in part, allows consumers to freeze access to their credit reports to allow them time to fix any problems resulting from an identity theft.

“I think it’s a good start,” said Jacques when informed of the program. “I don’t think it’s an end-all, be-all.”

The service providing FICO scores to consumers – for a fee – will be available by the end of March. “In conjunction with Equifax, we’re going to be providing a service that combines your Equifax credit profile, your credit score and a rich personalized score explanation report that describes for the consumer why they scored the way they did and steps they can take to improve their credit over time,” said Rapaport.

According to J. Michael Cummins, vice president and general manager of Equifax consumer direct, the service will list the four top reasons why the consumer received a particular score. It will also supply information and graphics comparing a score to the rest of the country and even how outstanding balances on credit cards can affect your score, he said.

“So the idea here is to educate and empower consumers and let them be proactive in managing and improving their credit situation so that they’ll be more creditworthy and a better pool for lenders,” he said.

It will even allow consumers more control, he said. If a person plans to apply for a mortgage in six months, he can look at his credit score and take steps between now and then to improve his score and his chances of getting a better rate.

In the past, Fair, Isaac had prevented credit scores from being shared with consumers, which resulted in accusations of secretiveness from watchdog groups. But now that an explanatory device is supplied with the credit score, the company is enthusiastic about the release.

“What we have always felt was, in conjunction with the credit report, the score and the explanation will make quite a bit of sense … We can be much more specific because the consumer will actually have the credit report in front of them as well,” said Rapaport.

“I think it’s a great thing, actually. At least the borrower now can go on a Web site and get some sort of explanation – because it’s [such a] foreign number,” said Dean Caso, president of Homevest Mortgage in Newton and chairman of the Massachusetts Mortgage Bankers Association.

A Big Factor
Although many consumer groups have targeted Fair, Isaac for unfairness, Rapaport says the consumer groups didn’t give the company a bad rap.

“We recognize we have to do a better job of educating consumers about what the score entails … The main thing is that statistical algorithms and modeling is a fairly complicated subject and it’s understandable for consumers to want to know more about it. What we’re trying to do is our best job of taking this fairly complicated subject of credit scoring and creating educational materials that actually make sense to consumers,” said Rapaport.

“That’s the challenge. We think we’ve got a good product that does that [a simple explanation of the score] but it is part of the challenge that it is a comprehensive and complex formula,” said Cummins.

“There are 25 factors or reason codes that go into this formula to help calculate what the score is for the consumers. We pick just the top four for any given consumer, and those are the ones that we imbed into [the] customized guide. We explain in detail what each of those four factors is, how they’re calculated and what you can do to improve those factors,” he said.

But the widespread distribution of scores is unlikely to substantially change the relationship between lenders and borrowers.

“I don’t think it’s going to be a bargaining chip for the consumer to come back and say, ‘Oh, I’ve got a 770 FICO score, can you give me a better rate?’ Well, no, because I still have to sell it to Fannie Mae or Freddie Mac and they’re still going to give me the same rate at 770 or 650,” said Caso. FICO scores generally range from about 300 to more than 900, with the majority falling into the 600 and 700 range, according to Fair, Isaac.

Cummins said consumers should think about a credit score like the SAT scores used for entrance into college. “When you apply to college they use the SATs – they look at your grades, they look at recommendations, they look at an essay you might write. So the SAT isn’t the only thing that goes into getting into college. And this is the same thing, the score isn’t the only thing that goes into determining who gets a loan, but it’s a big factor.”

A greater reliance on FICO scores has evolved in recent years as companies and banks began to use automated underwriting to streamline the mortgage origination process.

“The more the borrowers know, the better for the lenders,” said Jacques.

While it seems that the industry is moving forward, Jacques said she isn’t ready to drop her legislation just yet. “I certainly am willing to work with the industry … I’d certainly consider [whether] the law wasn’t necessary. I put a caveat on that only because if nine out of 10 are willing to do it but the 10th isn’t, that’s not fair to the consumers of that 10th provider’s services and I want to protect all consumers in this state, not just some of them,” said Jacques.

“I think that given all the events that have taken place in the last few years – both on the legislative front and the consumer groups – to make more information available, I actually think if we do a good job of this, then the benefits to lenders as well as consumers will be there. That’s what we’re hoping for – doing more education on both sides so that in the end everybody wins,” said Rapaport.