I added a home equity loan early this year and my FICO score at that point exceeded 800. Now it's auto insurance renewal time (my carrier for 14 years has been Pemco -- a major insurer in Washington State) and I was notified with the renewal that my insurance score is 724 and I did not get the highest level of discount. In the three years that Pemco has used insurance scoring, this is the first time that I have not received the highest discount level. Pemco says that it gives a 38 percent discount for scores at 800 and above; 30 percent for 750 - 799; 25 percent for 700 - 724; 19 percent for 650 - 699; 13 percent for 600 - 649; and 9 percent for 550 - 599.

After having scores of 800+ until now, I never thought that I'd qualify for a free Equifax report but I did request one and was shocked to find that my home equity loan with First Tennessee Bank is listed as revolving. In going over my loan papers, I see that the bank does in fact consider such loans as revolving, rather than installment.

Some other observations:

1) the four reason codes I received were a) high B/L ratio; b) favorable length of time of credit history; c) too many new accounts; d) favorable number of installment loan accounts. Very strange -- I thought that the four reasons were supposed to all be negative, yet two are positive. If they're going to list positive reasons, strange that my lack of even one derogatory bit of info is not there, since that's supposed to be 35 percent of what goes into a FICO score.

2) I don't believe Pemco that they are giving a 9 percent discount to someone with a 550 FICO. I bet that 95 percent of the people would have at least that score and they aren't going to suddenly give discounts ranging from 9 to 38 percent to most of their customers.

3) of course insurance scores might be a little different than the FICO, but it seems to have a close relation. I'm being penalized at least 75 points for having a home equity loan because it looks like I have 30K in credit card debt, when in fact I have less than $500, out of $17,000 available or 3 percent. With my loan classified as revolving I am utilizing 64 percent of what's available to me and that caused a huge drop in my FICO.

4) FICO tells us that they continuously update their software to reflect real consumer behavior. If that's true, with so many home equity loans out there these days FICO should be updating the models to lower the penalty for having revolving debt. The better solution is to classify these loans as installment debt or just like mortgages. I will stipulate that I'm no expert, but one reason mortgages and home equity loans have lower interest rates is because the risk to the lender is less. FICO also tells us that consumer finance accounts are more risky. The same cannot be said of home equity loans, and I bet that nobody gets penalized 75 points for having a loan from ITT!

5) I have never heard of a lender or insurer requiring 800 for its best rates. What is the highest anyone has ever heard? I think I may have heard of a few loans requiring 750, but isn't 720 generally going to give you the best rates at almost anywhere? This has really hurt me and I started with a score of 800. For those starting with a 700, you'll see more rejections for credit cards, mortgages, insurance, and many will see their interest rates go up. Consider the ramifications before you get a home equity line -- you might not be aware of the financial downside.

6) I've always had a good relationship with Pemco so am sorry to leave them after 14 years with no accidents, but have found some better deals. Insurance scoring in Washington State was strictly regulated earlier this year in what was called the most restrictive laws in the nation. Washington will not allow inquiries, medical collections, the use of a particular type of credit card, or the absence of credit history to affect premiums. That must mean that there is a custom insurance score from FICO for each state. I'm going to contact my insurance commissioner.

7) For the average consumer, getting the credit report without the score is not much of a help. Most people would not seize on the fact that the home equity loan is causing the problem since they associate it with their mortgage. Consumers need to know exactly which accounts are causing lower scores.

'1) the four reason codes I received were a) high B/L ratio; b) favorable length of time of credit history; c) too many new accounts; d) favorable number of installment loan accounts. Very strange -- I thought that the four reasons were supposed to all be negative, yet two are positive. If they're going to list positive reasons, strange that my lack of even one derogatory bit of info is not there, since that's supposed to be 35 percent of what goes into a FICO score."

I think they pick those percentages out of a hat. When people started asking questions about scores, Fair Isaac threw out these figures to give some answers and make the questions go away.

So many times I see people give credit scoring advice at other forums based on the Fair Isaac propaganda. They are so proud that they read what Fair Isaac feeds them and they never question anything.

Fair Isaac started giving out positive factors to consumers too, I guess to make people feel better. The lenders don't see the positive factors. It's all marketing and propaganda.

"2) I don't believe Pemco that they are giving a 9 percent discount to someone with a 550 FICO. I bet that 95 percent of the people would have at least that score and they aren't going to suddenly give discounts ranging from 9 to 38 percent to most of their customers."

Exactly!!

"3) of course insurance scores might be a little different than the FICO, but it seems to have a close relation. I'm being penalized at least 75 points for having a home equity loan because it looks like I have 30K in credit card debt, when in fact I have less than $500, out of $17,000 available or 3 percent. With my loan classified as revolving I am utilizing 64 percent of what's available to me and that caused a huge drop in my FICO."

You got it! Unfortunately, I don't have a home equity loan, so I couldn't sue for that.

"4) FICO tells us that they continuously update their software to reflect real consumer behavior. If that's true, with so many home equity loans out there these days FICO should be updating the models to lower the penalty for having revolving debt. The better solution is to classify these loans as installment debt or just like mortgages. I will stipulate that I'm no expert, but one reason mortgages and home equity loans have lower interest rates is because the risk to the lender is less. FICO also tells us that consumer finance accounts are more risky. The same cannot be said of home equity loans, and I bet that nobody gets penalized 75 points for having a loan from ITT!"

That's true. But you can't classify HELOCs as installment loans, because that's not what they are. However, they SHOULD classify them as HELOCs and rate them accordingly, i.e. just like an installment loan. Or they could rate them based on the HELOC notation.

The HELOC discussion

"5) I have never heard of a lender or insurer requiring 800 for its best rates. What is the highest anyone has ever heard? I think I may have heard of a few loans requiring 750, but isn't 720 generally going to give you the best rates at almost anywhere? This has really hurt me and I started with a score of 800. For those starting with a 700, you'll see more rejections for credit cards, mortgages, insurance, and many will see their interest rates go up. Consider the ramifications before you get a home equity line -- you might not be aware of the financial downside."

I have never heard of an 800 requirement either. I think 725 or so was highest I've seen.

But I doubt that creditors will raise their requirements:

When people like you get declined or lose that "discount", they run the risk of strong opposition.

You're not uneducated, poor, depressed and/or just short of insolvency like MOST people who are interested in credit and scores.

So many people just want to have good enough credit to finance a car or house at any rate.

A typical American consumer

I'm amazed how financially ignorant so many consumers are, even the ones with internet access and not uneducated. Why don't they read the Credit Scoring Basics and the other topics in that Credit Scoring Forum?

And while there are many readers who do have the IQ to see how outrageous credit scoring and reporting truly is, they just can't do anything because they have too many other problems.

They don't have the time and money, the skills to complain effectively, and some are just too sick to put up a fight.

Most people do their rant at some forum, and then they go back to watching TV and drinking beer.

Until recently, few insurers notified their customers of credit based rates, and of course people who DO have legitimate derogs don't complain.

When people with excellent credit and high scores get upset, that's when Fair Isaac has to worry.

"6) I've always had a good relationship with Pemco so am sorry to leave them after 14 years with no accidents, but have found some better deals. Insurance scoring in Washington State was strictly regulated earlier this year in what was called the most restrictive laws in the nation. Washington will not allow inquiries, medical collections, the use of a particular type of credit card, or the absence of credit history to affect premiums. That must mean that there is a custom insurance score from FICO for each state. I'm going to contact my insurance commissioner."

It sure looks like it they're making custom scores. And I really do hope you get a response from your insurance commissioner.

I haven't researched insurance scores at all - just look at this forum and the lack of interest. And that's why I'm especially thrilled that you posted.

"7) For the average consumer, getting the credit report without the score is not much of a help. Most people would not seize on the fact that the home equity loan is causing the problem since they associate it with their mortgage. Consumers need to know exactly which accounts are causing lower scores."

I could not agree more!

I had Fair Isaac, the CEO and a couple employees served last month, but they haven't filed anything yet. I obviously don't expect to prevail in my suit, especially since I have no legal skills, no lawyer, and next to no funds. But I hope to inspire some attorneys and other consumers to file many suits.

The paragraphs from my complaint relevant to Fair Isaac

Hello,
I wanted to answer your comment about some home loans considered "revolving" sorry if someone already responded to this. The reason for that is whatever you pay on your HELOC you can use again to purchase things or whatever. On a regular Mortgage you cannot do that. SO it is like a credit card.
As far as the Insurance thing I have Pemco also and my Homeowners Insurance has gone up over a $100.00 this year also because they are telling me my Insurance Score isnt high enough to get the discount even though my Credit Score is in the high 600s. ( I just pulled my Credit 2 days ago) I find this to be a bunch of hogwash. Unfortunately, I have shopped around and it would cost me about $ 300.00 more a yr to go with someone else. If you have any Insurance companies cheaper than Pemco please tell me.

Thanks!!

Of course you can use HELOC money for anything, but what's the difference? It's SECURED by the house, and that's why the rate it low. You can use the money from a 2nd, 3rd or 4th mortgage for beer at the bar or anything else!

Why should you pay more for insurance just because the loan is a HELOC? Terry couldn't get ANY money from the HELOC, since it was fully utilized to pay off the mortgage.

As far as rates go, most insurers use credit scores and I have no idea who is cheaper.