‘Bankruptcy’ Score a Shock to the Credit Rating

I’ve just had a personal experience with the credit scores on which a growing number of lenders rely.

The incident is relevant, I think, because these scores are far more complicated and difficult to decipher than one would imagine at first sight. My case shows, in fact, that getting a copy of the score--something more consumers are demanding--is only a bare start.

It turns out there are many different scores, which probe different aspects of one’s credit picture and they are interpreted variously by the companies using them.

After hours of discussions over the last week with the chief spokesperson for Experian, one of the nation’s biggest credit reporting firms, and with staff of the L.A. Times Federal Credit Union who gave me a new car loan, I understand the meaning of the “bankruptcy” score issued for me by Experian. But I still have a few questions how fair it is.

As a result of this score, my three-year auto loan for $11,764 came at 9.2% interest, rather than the credit union’s best current rate of 6.2%. The difference will amount to me paying about $575 more, or $7.39 per biweekly paycheck.

I had $7,000 in cash last week to put down on a new Camry to replace my 1993 Camry, which had 138,662 miles on it.

I went to the Toyota dealership where I had purchased the first car, because my experience there had been good. They sold me the new car, with the same stick shift I like and no extras, which I also like, for $20,764, including taxes and license. They gave me a $1,000 rebate and a $1,000 trade-in on the old car, which was a little banged up though running well, and took my $7,000.

I then went to the credit union for the $11,764 still owing, without a shadow of doubt that I would qualify for its best “platinum” rate, the 6.2%.

My reaction was at first quite emotional (read, angry) when I was informed that I only qualified for its “silver” rate, two steps down, as a result of an Experian bankruptcy credit score of 525.

My rating from another credit reporting firm--a FICO rating from Fair Isaac of San Rafael, Calif.--was 758, which would have put me in the “platinum” category, but, in a move to stem a rash of defaults, my credit union began, on June 28, also to use Experian’s bankruptcy score, said Troy Gray, the credit union’s senior vice president for lending.

It adopts the poorer score in choosing its lending class: platinum, gold, silver, standard, or credit builder. Anyone under credit builder is rejected, and many are.

Gray calmed me down, then gave me in addition to my credit scores, which are provided on request, my full Experian report, which usually is not disseminated.

She explained that the bankruptcy scores range from 108 to 8,999, and that the credit union rejects making any loan when the score is 900 or higher.

Alexander Kort, CEO of the credit union, said anything over 1,200 means a person is on the brink of bankruptcy. He added that for fairness reasons the credit union takes into account only the scores in deciding on a loan, not directly the applicant’s past payment record, which is part of the FICO score.

Mike Chaplin, the credit union’s senior vice president for marketing, explained that one’s FICO score is good if he or she has managed to meet all payments on time, but the bankruptcy score can be less so if the balances on your other debts, including credit cards, are high. The Experian score is a better measure, he asserted, of the risk someone will default on a loan later.

Neither of these scores, however, makes any attempt to measure a person’s assets or annual income.

That’s what fooled me. Knowing my assets and income, nearly a third of which comes from outside The Times, I thought it was unlikely I would go bankrupt.

The credit union had cited four factors given by Experian as contributing to my 525 “bankruptcy” score. They were murky. I called Maxine Sweet, spokeswoman for Experian, in Dallas, for elaboration, generating an hour’s explanation.

Sweet emphasized it is up to each lending institution to interpret Experian scores according to its needs. Interpretation might not be consistent between companies.

But, she went on, high balances on my two personal credit cards, Visa and Master Card, of $7,167 and $8,471, vis-a-vis limits on the cards of $12,100 each, “are the most negative influences on your score.”

They are not nearly as bad, however, as making late payments, or missing payments, neither of which I’ve ever done.

Another possibly negative factor came from my mortgage balance of $185,738, Sweet said.

That, however, struck me as more a reflection on the housing prices in L.A., than my credit status. I have no second trust deed, and residences in my neighborhood are presently selling for around $400,000. But neither the FICO nor bankruptcy scores attempt to measure equity in a property.

As for two other score factors mentioned by the credit union, Sweet said that neither had a negative effect. One concerned recent payoffs of accounts and the other sufficient credit history.

A $37,500 unsecured 1995 earthquake repair loan on an income property, which now is paid off, did not influence my bankruptcy score, because it was a business, not a personal, loan.

My sister and I each have a half interest in the property and the fact we owe not a cent on it was one reason my confidence in my credit status was so high. But these facts had no influence on my so-called credit scores.

Both Gray and Sweet said a strong emotional reaction is common when one is given an even slightly adverse credit score.

“We obviously take pride in making all payments on time,” said Sweet. “Suddenly to have some hint you are less than good, or less than diligent, can be emotional.”

Certainly. But I am determined before I next buy a car, probably after I retire, to take care to pay off both of these credit card balances and pay down the mortgage.

* Ken Reich can be contacted with your accounts of true consumer adventure at (213) 237-7060 or by e-mail at [email protected].