Monday, March 23, 2009

Credit Scores May Be On The Rise, But Will it Last?


That's the headline over at The Wallet, a Wall Street Journal blog that I read daily. According to the story, the average credit score rose slightly in February -- to 678 from 676 in January. The Wallet was citing the U.S. Credit Score Climate Report, which is published by Credit Karma, a company that provides free credit scores at its Web site.

From the story:

The U.S. Credit Score Climate Report, which included 24,000 Credit Karma users, found the average score of those surveyed rose slightly in February, to 678 from 676 in January.

Particularly encouraging, the percentage of the participants seeing an increase in their score rose — to 39% in February from 37% in January — while the percentage seeing a drop fell — to 29% from 31%.

But don’t rising unemployment and shrinking credit lines suggest scores should plunge? Yes, probably. But these same factors have made consumers wary of taking on more debt and have prompted many to save money and curb card use.

“The effect of lower spending and credit is dwarfing the effect of reduced credit lines and reduced credit in the economy,” says Kenneth Lin of CreditKarma.com, which tracks the credit scores of over 250,000 users. “The more dominant effect is savings and less reliance on credit.”

My questions: where do these scores come from? Are these FICO scores? Are they the PLUS scores produced by Experian? I couldn't find the source of these scores on Credit Karma's Web site (though it may be there). After doing some digging, I finally figured out that Credit Karma uses TransUnion's TransRisk score (see interview with CEO of Credit Karma here. These are scores that lenders generally do not use. In fact, if anyone knows of a lender that uses TransUnion's TransRisk score, please let me know. For the record, most lenders -- some 90% -- use the score developed by FICO. Full disclosure: I have a financial relationship with FICO; if you buy a score using a link from my blog, I get a commission from the sale.

While I found The Wallet's story interesting, it would have been useful if it had mentioned that the credit scores highlighted in the story are those that can and should be ignored by consumers. I wish the Wallet would have told me why I need to care about Credit Karma's latest data.

You can read the rest of the Wallet's story here (link).

23 comments:

  1. I also think that median or averages won't tell the whole story. I think there are people that are not affected by the recession paying off debt and improving their credit score while there are people that are affected having their credit scores get destroyed. While the average "might" be increasing I worry about the effects of all the lower scores out there. I would like to see a report that shows how many scores are below 620 today as opposed to 2005. Many of these delinquencies are severe like foreclosures or repos. Those people will be out of the credit game for a while which will effect consumer spending.

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  2. Well, I had a slight bump in my Credit Karma score last month. Thanks, B*!!

    I wonder if people haven't become more interested in their scores, so more are checking everyday now, and that's exactly what's happening? That would be hilarious.

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  3. CS, should we care about CK scores? That's what I am wondering.

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  4. Because CK is a TU product, it's not even good for B*, much less it's score.

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  5. Clutchcargo, I've read all the posts about how TU products aren't good for B*, but that hasn't been my experience. I haven't paid for a puller in months. I've only used CK. I pull each day and there is nothing left to B* as of two weeks ago. Maybe it's an anomaly. I don't know. But it has worked.

    CM, no, we should not be caring about these scores. They're not used by anyone. Of course, I have several friends who check their CK scores, and we compare, so it's fun for that. Otherwise it's useless until an actual lender somewhere starts looking at them.

    I would say that even if the article had been talking about FICO scores, a two point change from month to month is, I feel, statistically insignificant. And Credit Karma doesn't provide, at least in that article, score data from months going further back. It does mention a 651 figure from Transunion, but is Transunion using Ficos, Vantage, or TransRisk when throwing that number out there?

    Even if the Transunion 651 figure from the end of 08 is the same TransRisk score that Credit Karma uses, that doesn't mean that average scores have gone up nearly 30 points.

    Transunion has access to data about all consumers that have credit reports with TU. Credit Karma only has access to scores from users who go to their site; and it only has access to the scores they pull there, not their credit profile overall throughout time. So their data are very limited.

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  6. Yeah, well, I'm betting those in the same boat as me, with credit limits being lowered to just above balances, and having to opt-out of rate increases, and having the account closed are NOT included in this group. While I have mucho debt, my score, at least a year or so ago, was in the 740 range. Now I'm afraid to even look, but its a moot point, as I certainly don't intend on opening any more accounts or anythting like that. I'm just thankful I bought a car a couple of years ago, when I got a GOOD rate, as now I'm not even sure I could get approved for anything!

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  7. Caughtshort, I have to admit that I was talking out of my rear when I mentioned CK was not a good bumper, I don't use it for that and was only going off of what I have read. I'm glad it's working for you.

    As far as the score it gives, I confess that when it jumps or drops I will pull a report from some other free service and sometimes it works as a heads up.

    I guess I can't complain, it is free after all.

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  8. Is equifax Fico from MyFico tending towards the high range or the low range of the three bureaus, or does it very by individual?

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  9. I don't know if someone knows that answer for sure, Anon. My EQ score does tend to be slightly higher (by about 5 points).

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  10. My EQ score from MyFico is my lowest (by about 5 points).

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  11. So we're back to even -- if you just use CC and me. I'd guess that the scores are fairly close for most people. But, as always, YMMV.

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  12. Thanks for the input, that's interesting it's individually different. I asked because the score just came back a lot higher than I expected.

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  13. My EQ is my middle score, EX was my lowest, and TU is always highest.

    But there are items on some that aren't on others. So if my default judgment were gone from EX I would expect it to be a lot higher.

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  14. My EX is missing one thing. My TU and EQ reports have the same items. EQ is slightly higher than TU. EX is the lowest.

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  15. I agree with the poster "Anonymous" above who states with all the slashing, closed accounts, opt outs and APR increases, I don't care to look at my score. I had 700 across the board in December, but since then BOA, Chase and Citibank have taken adverse action on my accounts.

    I am thankful that we are planted in our home and able to pay for it as of now and make a pretty decent income as of now; no one knows what tomorrow will bring, but I do know worrying about a FICO score is not on my agenda. You need to have debt to have a credit score.

    On the Nightly News last night a man had an 864 credit limit and now his credit limit is 762 as Chase slashed his $19,000 credit limit to $300!! He said he PIF every month and what can he do with a $300 credit limit??

    Our goal, hubby and mine, are to be out of debt and use debit cards and not worry about FICO. Cash IS King!!!
    CiifIcare

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  16. Ciif, an 864 limit? A 762 limit? You mean scores there?

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  17. P.S., no one has a score of 864 -- unless you're talking about VantageScore, which goes from 501-990. Or the TransUnion TransRisk score, which goes from 100-900. But FICO is 300-850.

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  18. CM;

    I'm sorry I was trying to see if Brian Williams' Nightly News had a transcript of last night's program on their website so I could accurately report the scores.

    I do recall, however, that the man said he had a 864 score (now it may have been 846 but it was definitely in the high 800's) and now his score was 762! I know the 762 is correct. I didn't know if FICO had changed their tables or not.
    CifIcare

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  19. Ciif, if it was 864, it was some non-FICO score. As I said previously, VantageScore goes up to 990. TransRisk goes to 900. It might have been one of those scores. FICO continues to have a range of 300-850.

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  20. In my opinion, not every FAKO is created equal. The main appeal of the TransRisk score for CK and other consumer sites is that it's the cheapest, by far. But it's scaled much differently from the FICO score and uses much different characteristics, so a change in TransRisk is not very good at indicating either the direction or magnitude of the change in FICO score.

    Which bureau score is the lowest depends not only on the information in the individual files, but also on the score version. Each successive version of the FICO score has a higher average but greater dispersion than the previous one.

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  21. Peter, it's my understanding that CK figured out a way to rescale the TransRisk score. CK does offer scores that range from 300-850. Not sure how it did it, though. TransRisk ranges from 100-900. Someone want to explain the math to me?

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  22. The simplest would be CK = TransRisk * 550 / 800 + 231.25. Still wouldn't have the same characteristics or distribution as the FICO score.

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