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
300’s 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.
ISN’T 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
American’s 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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