Credit
Credit Scores Online
FICO
scores are available online, on websites such as http://www.myfico.com, for about $45 for scores from all three different
bureaus. This is significantly at a higher price and
more difficult to get than potential creditors would
want to pay for the same information; for instance a loan broker is able
to get all three reports with FICO scores for as little as $15 with only a
name and social security number.
Purpose of a FICO Score
A FICO score is
essentially a tool for those financial institutions or individuals who
look to obtain debt. There are many bizarre myths surrounding the reason
why one should build a FICO score, that are spread by the banking industry
and the media outlets they endorse, as also do many self proclaimed
financial advisers. Some of these myths proclaim that you need a FICO
score to rent apartments, student loans, cars, obtain cell phones, and
home loans though many established financial advisers point out that this
is not the case in reality. Some other financial advisers advocate against
using debt and instead opine you'd rather use your personal income to
build wealth and save for purchases. They proclaim that even though many
of them are millionaires themselves, their own FICO score is 0 because
they do not borrow money or have any debt.
Most importantly what
needs to be noted hence is that a FICO or Credit Score is not an indicator
of wealth but rather a tool used by banks and other lending institutions
to determine credit worthiness when lending money to an individual.
Furthermore it has been seen that a high FICO or Credit score is necessary
only if an individual or financial institution is looking to continuously
obtain debt.
Make-up of the FICO Score
FICO scores
and its variants have been designed to measure the risk of default, by
taking into account various factors. Although the exact formula for
calculating the FICO score is a closely guarded secret, Fair Isaac has
disclosed the components and the approximate weighted contribution of
each. This approximate makeup of the FICO score that Fair Isaac has
disclosed to consumers is as follows:
o 35% punctuality of payment in the past
o 30%
capacity used which is the ratio of current revolving debt (for example
credit card balances) to total available revolving credit (for example
credit limits)
o 15% length of credit history
o 10%
recent search for credit and / or amount of credit obtained recently
o 10% types of
credit used (for example installment, revolving, consumer finance)
The above percentages
provide a very limited degree of guidance
in understanding a credit score. For example, the 10% of the score
that is allocated to 'types of credit used' is undefined, leaving consumers
unaware what type of credit mix to pursue. 'Length of credit
history' is also an unclear concept since it consists of
multiple factors like being the oldest account open and the average length
of time an account has been open for. Though only 35%
is attributed to punctuality, if a consumer is substantially
late on numerous accounts consecutively, his score is sure to fall
far more than 35%. Bankruptcies, foreclosures, and judgments are certain factors
that affect scores substantially but are not included in the simplistic pie chart provided
by Fair Isaac.
Furthermore, Fair Isaac does not use the
same 'scorecard' for everyone. The scorecards have been segmented so that
there are over a hundred different actual scoring models that are applied
to different individuals based on different ranges of input values; some
scorecard segmentations for instance include age, depth of credit history,
etc. The implications of this kind of segmentation are that while the
approximate weighted contribution detailed above may be an average across
all scorecards, individuals will receive different scores or weightings
based on the scorecard segmentation category that they fall into. Some
consumers have noticed their scores decreasing by small amounts for no
apparent reason and fail to get an explanation in this regard from the
scoring authorities.
The FICO score is not all important too; although current
income and employment history do not influence the FICO score, but they
are also considered while applying for credit. For example, an unemployed
individual with no other sources of income will not usually be approved
for a home mortgage, regardless of his or her FICO score.
There are several other special
factors which can weigh on the FICO score:
o Any funds owed because of a court judgment, tax lien, or any
similar dictate, carry an extra negative penalty, especially when recent.
o Having above a certain number of
consumer finance company credit accounts also calls for a negative weight;
critics are of the opinion that this causes a vicious cycle, locking
people into continuing to use consumer finance companies and hence should
be avoided.
o The number of recent credit checks
also can weigh down on the score, although the credit agencies claim that
credit checks that are made within a certain window of time do not
aggregate, thus allowing the consumer to shop around for rates.
Range of Scores
FICO scores range on
an average from approximately 300 to 850 and exhibit a left-skewed
distribution with a United States of America median around 725. A score
above 720 is generally considered to be good credit, while a score below
600 is considered to be poor.
