February 21, 2011 (Chris Moore)
Fair, Isaac & Co., the folks who originated the closely guarded “FICO” credit score, have launched a website that helps consumers understand how credit scores can affect many areas of your life in this era of new financial regulations. The company also recently opened up about how your activities can influence your credit score.

The recently launched website, scoreinfo.org, explains the importance of credit scores and how they are used in areas other than just obtaining a loan. What many people don’t realize is how credit scores are being used to make decisions by companies that have nothing to do with credit. Even though FICO scores were designed to be used purely for financial reasons, they have now become part of the application process for jobs, car insurance, and health insurance.

There is a lot of mystery surrounding FICO scores as Fair Isaac doesn’t release the formulas that are used in the process of determining your FICO score. FICO creates the score simply by feeding numbers into its formula which FICO says is “based on pure, statistical evidence, with no judgment or evaluation or emotion.”

“The FICO score is a measure of a consumer’s financial health and creditworthiness,” said Mark Greene, chief executive of Fair, Isaac & Co., creator and proprietor of the FICO score. 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 in the country uses a FICO score when making lending decisions. But while the scores are important, they’re not the be all and end all.

“Scores are meant to be one of several things bankers use in doing what we call sound underwriting,” Greene says. Lenders should also be taking into account borrowers’ background references, their capacity to repay loans, and collateral.

There are several factors that Fair, Isaac takes into consideration. Some of the main one’s 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.”
– 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 points out that there are three key elements which people can do to improve their credit scores:

– Pay your bills on time.
– Don’t use more credit than you really need. Keeping your balances close to their limit hurts your score.
– Don’t apply for credit unless you absolutely have too.

The easiest way to avoid a sharp downgrade? Stay current on your mortgage and stay solvent. 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.

“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.

And one of the most asked questions…does every application for a loan hurt 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.”

However, with credit cards it’s a different story. If you try to open five different credit card accounts in the space of a week, that’s usually an indication of someone trying to open multiple accounts simultaneously in which case a few points would be taken off your FICO score as that sends out a signal that you need too much credit.

We’ve covered the basics, but if you’d like more information, go to scoreinfo.org.

Tags: Fair, Isaac & Co., FICO, FICO score, credit score, loans, mortgages, borrowers, indebtedness, creditworthiness