Expert Offers The 411 On FICO Scores
Sat, 30th Aug, 2008ASSESSMENT OF CREDIT WORTHINESS KEY FOR ALL CONSUMERS
Anyone who has applied for a mortgage or a credit card in the past couple of decades almost certainly has had his or her "FICO score" scrutinized by the lenders who decided whether to approve the loan or issue the credit card. FICO scores gauge how likely consumers are to pay off their debts, and they take their name from Fair Isaac Corp., which began developing credit-scoring formulas more than 50 years ago. Founded in San Francisco but now based in Minneapolis, Fair Isaac provides custom credit-scoring systems for each of the three nationwide credit-reporting bureaus, Equifax, Experian and Transunion.
As head of Fair Isaac's consumer education and advocacy initiatives, San Rafael-based Barry Paperno is an expert at breaking down the mysteries of the FICO score for befuddled borrowers. Paperno recently spoke with Mercury News reporter Sue McAllister about that. Here is an edited version of their conversation.
Q Let's do the basics first: What is a FICO score?
A It is an assessment of your credit worthiness, in the form of a three-digit number from 300 to 850. The higher the score, the lower the risk to the lender, and the better for the consumer. The score is a predictor of future risk to a lender, and it is based entirely on credit information found in a credit report.
Q Which parts of a credit report matter to the FICO score?
A There are four parts of the credit report the score looks at. The first is credit account information (such as home loans, car loans and credit cards). The second is collection items, for example a doctor's bill that's been unpaid and they hire an agency to collect. The third is public record items. That can include judgments, for example if a creditor has taken you to court; and federal and state tax liens and bankruptcies.
The fourth area is inquiries. That's anytime anyone, usually a lender, looks at your credit when they are making a decision about whether to extend you credit.
Q Are "inquiries" bad?
A Inquiries can negatively affect your score, but it's going to have minimal impact if any.
Q How many years back does a credit score look?
A It's looking at everything on your credit report, no matter how old. But most negative information falls off after seven years.
Q What's a common misconception about credit scores?
A One is that having too much credit available to you puts you at a higher risk potential than someone who has less credit available to them. There's not a lot of positive correlation between having a lot of credit available to you and going out and using it irresponsibly. We just don't see that, so there is nothing to be gained by closing off available credit.
Source: http://www.mercurynews.com/
