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Scores have their most obvious impact when someone applies to borrow money. The potential lender will run a credit check and acquire a credit report from one or more of the major credit bureaus. (Experian, Equifax, and Trans Union are the largest and best known.) The report will come back with facts about the person's credit history and a credit score.

Brenda M. Carhart, senior vice president/chief lending officer at Power FCU, says that she has seen scores ranging from the 300s to 800. Pointing to charts, she explains that there are Arated borrowers, with scores above 680; B-rated borrowers, with scores from 640-679; C-rated borrowers from 600-639; D-rated borrowers from 550-599; and E-rated borrowers whose scores are below 549.

On the chart, interest rates rise as ratings decline. While an A-rated borrower may pay 8.95 percent for a loan, a B-rated borrower would be charged a full two points higher. A Grated borrower would pay two points higher still. The D-rated borrower would face an interest rate of 15.95 percent, and a borrower with an E rating would pay 17.95 percent interest.

Those differences in rates add up very quickly Rex Johnson, a lending consultant to credit unions and a former credit-union president, explains that "on a car loan you can save $8,000," by having a better credit score.

Johnson, who has advised Power Federal Credit Union since the late 1990s, coaches credit unions around the country to work with their members to improve their credit scores. It is part of what he calls the "Wal-Mart model."

"People go to Wal-Mart and shop because they think they are getting a great deal," he says. Applied to the lending market, Johnson's model pushes credit unions to help members improve their credit scores so they can borrow money at a lower interest rate. "I'm going to show you how to drive up your score and lower your rate," Johnson says, portraying a credit-union lending staffer.

Showing members how to save money can make them more loyal, Johnson says. That gives the credit union more chances to make loans, driving up creditunion revenue.

Carhart pulls a visitor's credit report from Trans Union. It shows all the car loans, mortgages, and credit cards the person holds, or has held. It tells the balance on each, the total capacity the person has for borrowing, and what percentage of that capacity is being used.

"Capacity is king," she says. She passes along the story of a le that sought the lowest loan rate and tried to improve their credit score by getting rid of credit cards. The exercise proved counterproductive. With fewer cards, their borrowing capacity, as outlined on the credit report, fell.

Carhart looks at problem areas highlighted on the credit report and offers suggestions that may enhance the score. That may mean paying off an old debt. It may mean catching up on certain bills. It can help to move debt from revolving accounts to installment accounts. Taking those actions can bring savings quite quickly. Carhart explains that if a member takes out a loan and also takes the credit union's advice and earns an improved credit score, the loan can be financed at a lower rate in six months. "We take the same loan," she says, "and just adjust the rate."

In the last year, according to Power FCU, somewhere between 35 and 40 members used its "score-enhancement program" to develop better credit scores and achieve lower interest rates on loans.

While going over a credit report with a member as part of the scoreenhancement program, Power FCU's lending-staff members look at other loans in the report and, Carhart says, stand ready to offer a Power FCU loan if the credit union has a better interest rate. Such "buyouts" as they are called, accounted for approximately $31 million in new loans for Power FCU in 2004, Carhart says. She tells of one member of the loan staff who made $1 million in such loans in the month of December.

"Do -4 think it builds loyalty? Sure," says Carhart. "You know that the credit union helped."

In addition, Carhart points out that a lower credit score is not an inborn defect. Instead, "something typically happens" that causes a person who had been paying bills to stop doing so on a timely basis. She lists illnesses and medical bills, divorces, and failed businesses as the sort of events that push borrowers to act in ways that lower their credit scores.

Carhart, who has been in credit-union lending for 15 years, explains that the loan market is split between people who borrow based on interest rates and those who borrow based on the payment they can afford. In addition, she says those with A credit - which is about 90 percent of her credit union's members know they have great credit and expect to pay lower rates. While Power is always reviewing the competition, she admits, "we can't beat the rates all the time."

Carhart also allows that those who have lower ratings (what she calls "colorful credit") are treated differently. "We close those loans differently," she says. Borrowers are told that the loan is a chance for them to prove themselves and improve their credit scores.

Pat Keefe, spokesman for the National Credit Union Association in Washington, says that more than a third of credit unions have some sort of credit-counseling service. "You've got to look at the way credit unions work," he says. "It is in their interest for members to be more savvy about how to use their credit."

It is, he says, a lot less expensive to have a program to help members understand credit scores than to collect "defaulted loans."

Copyright (c) 2006
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