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Codeword: Subprime
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December 14, 2000: 8:58 a.m. ET
Consumers lose loan game with credit score
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NEW YORK (CNNfn) - When a batter strikes out at the plate, at least he knows the score. Consumers looking for a loan may not be so lucky.
An article appearing in the January issue of Consumer Reports said borrowers are tagged with a credit score that is a key driver in determining the interest rate on their loans.
The three-digit score is based on your debt profile and bill-paying history and essentially predicts how likely consumers are to repay the loan. Credit bureaus and lenders know the consumer's credit score, but they don't tell consumers. Applicants don't know if they're getting a fair price or not.
"It's borrower beware," said Kim Kleman, special assignments editor at Consumer Reports.
Scores range from 375, the worst rating, to 900 and consumers with the highest credit scores are categorized as prime, while subprime borrowers with progressively lower scores are typically branded A-minus, B, C, and D.
Branded
The article said minor credit problems may brand borrowers as "subprime" and subject them to higher interest rates. Subprime borrowers pay higher rates and fees, consumer advocates say, and they are much more likely to fall prey to predatory lending practices.
Consumers with a prime rating have a credit score of at least 620 to 660, although the exact threshold varies.
Members of the Consumer Reports editorial staff and legal officials from Consumers Union, which publishes the magazine, spoke with reporters this week about their findings. 
"There's been a sharp increase in the number of consumers branded subprime," said finance writer Jeff Blyskal. "In most cases, (they have) only minor blemishes on their credit report."
The blemishes may not even be justified, advocates say, as 70 percent of credit reports have a least one mistake. Borrowers can't find out what their credit score is, but lenders do. Only California has a law, which takes effect in July, that will give consumers direct legal access to their credit score.
Consumer Reports said credit bureaus and lenders have been prohibited from revealing credit scores to consumers, according to their contract with Fair, Isaac and Co. (FICO), a San Rafael, Calif. company whose risk-scoring models are most commonly used to generate scores.
This situation may change, however, as FICO gave lenders last month the option of telling consumers their credit scores and credit bureaus have discussed releasing credit scores directly to the public—for a fee.
Most mortgage borrowers have a prime FICO score, but 30 to 35 percent are considered subprime.
The players
Subprime debt comes in almost every form, the article said, including mortgages, refinance loans, credit cards, and new and used-car loans. Total subprime lending increased tenfold, to $370 billion, between 1994 and 1999. Some of the big banks offer their own subprime loans, while others, such as Keybank, the principal of KeyCorp (KEY: Research, Estimates), Bank One (ONE: Research, Estimates) and Bank of America (BAC: Research, Estimates) have gotten into the market by purchasing subprime finance companies.
Recently, Citigroup (C: Research, Estimates) announced plans to acquire Associates First Capital and merge its North American consumer finance operations with CitiFinancial to create the nation's largest subprime lender.
What you can do
Consumers Reports has compiled a list of steps people can take to protect themselves from being unfairly tagged as subprime borrowers.
- Obtain and correct your credit report. About 70 percent of credit reports contain at least one mistake, according to the Public Interest Research Group.
- Demand credit scores from lenders, who should provide applicants with scores from each credit bureau. Consider avoiding those that won't reveal credit scores.
- Never assume you are subprime. Always apply first for a prime loan at a mainstream bank and avoid finance companies. Also consider a credit union, where interest rates tend to be lower. Credit unions tend to give more personal attention to credit report problems.
- Get the details: The bank should provide information about credit tiers and how they correspond with credit scores and interest rates. Other relevant information for mortgages and home-equity loans include added fees and points, prepayment penalties and balloon payment terms.
- Avoid predatory lenders. You should not deal with lenders who try to lend more than is needed, require credit life insurance, have balloon payments due in less than 10 years, charge excessively high rates and fees or don't disclose anything you want to know.
- Be ready to go prime. If you have a subprime loan, get back into prime territory with two or three years of responsible money management, then replace the high-cost subprime loan with a lower-rate prime loan.
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