OPP CREDIT SCORES
Many people have questions about the credit scores generated by Fair, Isaac & Co.
In a recent interview, Mark Greene, chief executive of Fair, Isaac & Co., creator and proprietor of the FICO score answers questions.
"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, lender, or anyone who extends credit, such as small business or landlords uses a FICO score when making lending decisions.
But while the scores are important, they're not the be all and end all or only factor.
"Scores are meant to be one of several items used in good screening.
Those who extend credit, should also be taking into account the persons background references, their capacity to repay loans, and collateral and public records checks, just to start.
FICO score, "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." (called a debt to income ratio)
• 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."
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.
Additionally lenders will 'sell' the bad debt to a 3rd party who may peruse the persons who borrowed as the 3 party is in many states no under the same restraints as the original lender.
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."
Credit performance is also a key factor... lenders, small business, landlords, ect . may enter information on the person with a bad record of payement.. Also any judgements show up
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.
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