How Fair, Isaac & Co. Generate Credit Scores
The interview with Daniel Gross begins here:
Many people have questions about the credit scores generated by
Fair, Isaac & Co. Today on Tech Ticker, Aaron Task and I figured
we'd take our questions straight to the source: Mark Greene,
chief executive of Fair, Isaac & Co., creator and proprietor of
the FICO score.
"The FICO score is a measure of a
consumer's financial health and creditworthiness," Greene says.
It's simply a number, ranging from 300 to 850 -- the higher the
better. The average FICO score in the U.S. is about 700, and
pretty much every bank in the country uses a FICO score when
making lending decisions.
But while the scores are
important, they're not the be all and end all. "Scores are meant
to be one of several things bankers use in doing what we call
sound underwriting," Greene says. Lenders should also be taking
into account borrowers' background references, their capacity to
repay loans, and collateral. FICO creates the score simply by
feeding numbers into its formula: "It's based on pure,
statistical evidence, with no judgment or evaluation or
emotion."
The main factors Fair, Isaac
takes into consideration are:
-
How much total indebtedness a
consumer has.
-
How long they've had the
debt. "Newer relationships are riskier than things you've
been paying over a long period of time," Greene says. * How
much available credit is being used: "If you're close to the
edge on your credit cards, that's a danger signal."
-
The mix of an applicant's
credit portfolio - is it all credit cards (bad) or a
mixture of credit cards, a mortgage, and a car loan
(better)? Greene outlines three key ways through which
people can improve their scores. First, pay your bills on
time. Second, don't get close to the edge: "Don't use more
credit than you really need." And third, don't apply for new
credit unless you absolutely have to.
It may sound obvious, but the
easiest way to avoid a sharp downgrade in your FICO score is to
stay current on your mortgage and stay solvent. "One thing
people should know is that a foreclosed home or personal
bankruptcy is the most severe harm that you can do to your
credit score," Greene says. FICO scores can fall by as much as
150 points when borrowers walk away from mortgages or declare
bankruptcy; it can take up to seven years to rehabilitate the
rating.
Greene helps clear up what may be
some misconceptions about the way credit scores are calculated.
For example, is it true that every time you apply for a loan it
hurts your score? "It depends on the kind of product you're
shopping for," says Greene. With car loans, for example, Fair,
Isaac understands that people shop for rates. "If you apply for
five different car loans within a couple of days, we understand
that you're looking to buy one car at the best rate. And there's
no adverse impact on your credit score." On the other hand, when
people apply for five different credit cards in the space of a
week, they're usually seeking to open multiple accounts
simultaneously. "In those situations we will take a few points
off someone's FICO score because we're worried they're sending a
signal that they need too much credit." Is it also true that
people who have little or no debt may find themselves with lower
credit scores? That can be the case. "Warren Buffett used to say
that he didn't have a particularly high credit score," says
Greene.
Consumers can obtain their FICO
score from the company at
myFico.com. (Editor's note: Greene says the report is free
in the accompanying video but you must register to receive your
FICO score and a payment is required.) Greene also points to a
just-launched website,
scoreinfo.org that helps people understand how credit scores
factor in this new era of financial regulation.
As of January 2011, you have the
right to receive your score any time a lender makes certain
kinds of decisions -- e.g., if you're denied credit or given
credit on less than the most favorable terms a lender offers. In
the U.S. economy today, people may frequently find that a credit
score is being used by companies to make decisions that have
nothing to do with credit. Credit scores have become part of the
application process for jobs, car insurance, and health
insurance. Greene notes that the credit score can be useful in
non-lending contexts: "People who are good with their finances
frequently turn out to be good drivers." But he reiterates that
they were designed for a purely financial use.
View the video interview here
-----
CLICK
HERE FOR OUR FREE BANKRUPTCY ASSESSMENT
CALL NOW TO SPEAK TO AN
ATTORNEY - 856.429.2449
|
