Although lending institutions have been using credit scores since the 1990s, most consumers still don't know what their credit score measures, what good and bad scores are, or how their scores can be improved.What's more, most consumers (81%) know that mortgage lenders use credit scores, but fewer (47%) know that insurers use them when underwriting homeowners policies.

These are the findings of a recent survey of 1,027 representative adult Americans administered by the Opinion Research Corp., Princeton, N.J., for the Consumer Federation of America (CFA), Washington, D.C., and Providian Financial Corp., a San Francisco-based credit card company.

Nobody at myFICO.com, a division of Minneapolis-based Fair Isaac Corp., is surprised by these survey results, says Ryan Sjoblad, spokesperson for myFICO.com. The company operates a Web site that offers consumers information on FICO scores, a widely used credit rating developed by Fair Isaac in 1989.

"But one thing we can say is there has been a huge increase of knowledge even in the last year or two. People are becoming more intelligent about credit scores," he says. "Obviously, though, we still have a long way to go."

A good indication

The survey results are a good indication that consumer education is working, according to Lynn Knauf, policy manager at the Property Casualty Insurers Association of America (PCI) in Des Plaines, Ill.

"If you look at it, a relatively high percentage of consumers (47%) did know that credit information could be used in underwriting," she says. "So that's a real testament to the amount of informational materials that insurers are getting out there."

In fact, myFICO was launched in March 2001-11 years after Fair Isaac developed the FICO score. Prior to that, consumers couldn't get their score even if they wanted it-because the industry kept the practice under wraps.

"Lenders were afraid if people knew what goes into a credit score, they would either be able to jury-rig the system or they'd become worse borrowers because they could get around it," says myFICO's Sjoblad. "But then, people started to realize the better informed the consumer is, the better off everybody is."

Prior to 2001, most consumers didn't know insurers were using credit scores in evaluating risk and pricing policies. But between 1998 to 2001--after Fair Isaac discovered an association between certain aspects of consumer credit scores and the probability of loss--52% of the largest auto insurers' began using them.

As they did, underwriting anomalies began cropping up. For example, some senior citizens who never used credit cards and people who had a medical crisis suddenly experienced dramatic increases in their auto or homeowners insurance premiums-or they were turned down for coverage.

Not surprisingly, consumers, agents, policy makers, and state insurance commissioners demanded explanations, and the industry responded. Over the past three years, carriers, credit-scoring firms and trade associations have distributed information to consumers-via mail or on Web sites.

But the controversy continues. In September, the National Association of Insurance Commissioners (NAIC), Kansas City, Mo., adopted its insurance credit scoring regulatory best practices, which differ in several key areas from laws or regulations that have already been established in most states.

PCI asserts the NAIC's latest action is unproductive. "This isn't a good use of time," Knauf says. "Although credit scoring in insurance is still a hot issue, the majority of states have already taken action." Secondly, she says, the NAIC's efforts would be better spent focusing on other issues-primarily on consumer education. The NAIC could not be reached for comment.

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