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FICO ScoringFICO ScoringFICO ScoringFICO Scoring

Cracking the Secret CodeCracking the Secret Code

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Objectives• State the reasons for the

development of FICO scores.• Describe how credit reports are

created.• List the five biggest factors

affecting a FICO score.• Refute common myths about FICO

scores.• Explain the upcoming changes for

FICO ’08.

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How did FICO Scoring come about?

• In 1956, Fair Isaac was founded• Formulas eliminated bias• Greater efficiency• Individual formulas• Rise of the credit reporting

agencies

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How Scores Changed the Industry

• Consumer lending exploded in the 1990s.

• Freddie Mac and Fannie Mae bless FICO.

• Consumers demand to know more about FICO.

• The cat gets out of the bag.

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Where does the Credit Report come from?

Creditors

Local Credit

Bureaus

National Credit Reporting Agency

Consumer

Credit Report

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How do we get a FICO Score?

• Agencies gather from bureaus and then calculate

• Lots of variables• Confusion for customers and

lenders• Grouping of customers

(Scorecards)

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What are the Top 5 Components of the FICO

Score?• Payment history• How much you owe• How long you have had credit• Your last application for credit• The types of credit you use

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Caution – Results May Vary

• Scores vary from agency to agency

• Scores vary from lender to lender

• Different editions of FICO

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So what do Americans have for Scores?

FICO Score Percent with Score

300-499 1%

500-549 5%

550-599 7%

600-649 11%

650-699 16%

700-749 20%

750-799 29%

800-850 11%

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Risk of Default

0%

20%

40%

60%

80%

100%

up to

499

500-

549

550-

599

600-

649

650-

699

700-

749

750+

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What Else can hurt your Score?

• Collections, bankruptcies, judgments, etc.

• Too many credit cards• Transferring balances• Closing credit cards• High number of

consumer finance company cards

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FICO Myth or Fact?• You will not hurt your score by checking your own

credit report.• If one late payment occurs, higher FICO scores will

drop further than lower FICO scores will.• You have to pay interest and revolve a credit card

balance to have a chance at getting the best possible credit score.

• If you disagree with an item, adding a written dispute statement to your credit report can help your score.

• Your closed accounts should read closed by consumer – not closed by lender – or they will hurt you.

• Credit counseling is as bad as bankruptcy for your score.

• Paying off old bad debt can hurt your FICO score.

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Who’s Keeping Score?

• Lenders• Insurers• Landlords• Employers• Cell Phone

Carriers

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What Else are Scores Used for?

• Detecting fraud• Estimating profit• Predict bankruptcy risk• Estimate payments on

delinquencies• Anticipate likelihood of responding

to a credit card offer

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What is the True Cost?Emily with a FICO of 750Mortgage of $350,000Interest Rate 5.5%Monthly Payment $1,98710-Year Int. Paid

$174,760 Sally with a FICO of 650Mortgage of $350,000Interest Rate 7.375%Monthly Payment $2,41710-Year Int. Paid $243,020Sally’s Penalty $68,261

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What is FICO ‘08?

• Occasional mistakes hurt less.• Shopping around is not as

negative.• Different types of credit really help.• Keep balances low by spreading

them around.