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Published Articles by David Balovich

Title: Credit Analysis Versus Risk Analysis
Published in: Creditworthy News
Date: 2/25/04
 
The increasing use of credit cards in commercial transactions has created renewed interest in the credit score commonly known as FICO. As more and more personal (consumer) credit reports are being pulled to assist in the credit decision the consumer credit score is assumed to be equal to a D&B rating and although similar there are differences. We have researched credit scores and in this column will address the most commonly asked questions.

WHAT IS A CREDIT SCORE?

Today the credit score is one of the most important issues to understand and be aware of. Whether you are a seller or a buyer, most creditors, no matter what is being purchased make their decisions based on some type of credit score. In addition, the credit score in many cases will determine terms and/or interest.

The credit score is the number creditors use to help them decide whether to extend credit or not. In most cases, the lower the score the higher the risk. The scores found in consumer credit reports are based solely on the information contained in the report.  Fair, Isaac and Company (FICO) who developed the most widely used scoring model bases the majority of credit scores on calculations.

WHAT IS A GOOD CREDIT SCORE?

We have seen scores range from the low 300ís to well past 800. Again, the higher the score, the better the credit rating. Most creditors use a break of somewhere around 600 as the determining factor between an acceptable risk versus a high risk. Some creditors will not extend credit to applicants who score under 600 while others will approve credit, but on terms other than standard. A few creditors do automatic approvals for applicants who score 700 or higher.

ISNíT THERE SEVERAL DIFFERENT CREDIT SCORES?

Yes, there are three primary credit-scoring models. Equifax uses the BEACON credit score. Experian uses Experian/FICO and TransUnion uses EMPIRICA. Equifax, Experian and TransUnion are the three major consumer credit reporting agencies. Regardless of the names of their scoring models, FICO is the platform for all these scoring models.

WHAT MAKE UP THE FICO SCORE?

Generally, there are five criteria that make up the score. The biggest driver, as one would assume, is payment history. This makes up 35% of the score. Second, is the amount of money the applicant owes other creditors. This accounts for 30% of the score. Third, is the length of credit history, 15%. Fourth, new credit acquired within the last 12 months, 10%. The remaining 10% is the types of credit used; bank credit card, Installment loans, mortgages, and department store credit cards.

The following have no effect on the credit score: race, religion, sex, marital status, age, and length of employment, job description, length of residence, spouse or child support.

WHAT IS THE AVERAGE FICO SCORE?

The following is a break down of where most Americanís currently score:

Less than 1% score under 500

5% score 500 to 549

7% score 550 to 599

11% score 600 to 649

16% score 650 to 699

20% score 700 to 749

29% score 750 to 799

11% score 800 or more

HOW DO INQUIRIES AFFECT THE FICO SCORE?

Although inquiries do lower the FICO, because it indicates the applicant is applying for new credit the change is not considered material. Usually less than 5 points. Inquiries from mortgage companies or automobile dealers in a short period of time have no affect on the score as the system recognizes these inquiries as the applicant shopping for a specific product.

For more information on the types of credit scoring we recommend contacting the agencies whose credit score you are utilizing. The three major firms can be contacted at:

Equifax (800) 685-1111 or www.equifax.com

Experian (888) 397-3742 or www.experian.com

TransUnion (800) 888-4123 or www.transunion.com

I wish you well.  

This information is provided as information only and not legal advice. Legal advice should be obtained from a competent, licensed attorney, in good standing with the state bar association.


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