FICO Score Explained

FICO score is the original and the most respected credit score system in United States today. The score is used by all creditors to determine the possibility of the borrower’s (you) defaulting on financial obligations (loan) to the lender.
Let us give you an overview of the FICO score and answer your queries on the way.

What is FICO score - FICO is an acronym for the developers of this credit score, Fair Isaac Credit Organization. The FICO score is based on information as reported in consumer credit files by credit reporting agencies. Today all sorts of creditors like banks, credit card companies and even employers are looking at an individual or business’ credit score. Using high-level maths and statistics, FICO scores are calculated by taking as much as 30 variables in an individual’s financial history like

• credit history
• current level of financial obligation (Ratio of debt to available credit)
• types of credit used
• length of credit history
• new credit in determining credit risk

A FICO score can be any number between 300 and 850. The median FICO score varies but anything around 720 is considered to be standard. Any FICO score above 720 is a sign of creditworthiness whilst scores below 600 indicate horrible creditworthiness. Depending on the score, one may end up paying 10-20% more interest than one with a high score.

How it all started - We all have heard of myFICO. This is the consumer division of Fair Isaac Credit Organization which invented the FICO credit risk score to help lenders measure risk in giving credit to persons and business. Way back in the 1960s, Fair Isaac started a revolution of sorts by opening up credit risk scoring for the financial services industry. After that start, the approach helped financial institutions big or small to develop their business operations. Naturally the consumers’ credit market opened up wide to accommodate the growing demand of credit and with FICO scores, things were relatively easy.

FICO score and its popularity - A FICO score gives creditors a way of assessing an individual’s creditworthiness without looking at their income history or employment status. Prior to 1960s, the process was very time-consuming and the possibility of errors was high. Today Fair Isaac’s FICO score is widely recognized as the industry standard for lenders. Originally developed by the Fair Isaac Corporation, now a customer’s FICO score can determine credit limits he can access and interest rates that he has to pay. FICO score is a part of the credit report and the most vital part of it all. Some financial gurus have categorized FICO scores according to their usage and current forms. The most common ones are

Classic FICO score - The traditional FICO score used by all lenders to finance car loans, mortgage loans, personal loans and many other different types of loans. It is commonly used by modifying the formula by different CRAs and called Beacon, Empirica FICO Risk score etc.

Industry specific FICO score - An industry specific FICO credit score is used by lenders to assess specific risks in different industries with which they are in process of carrying out transactions. Car loans and motorcycle loans may have specific risks although they belong to the automotive industry.

NextGen FICO risk score - The newest version of the Classic FICO credit score but is more predictive in nature. The NextGen FICO is gradually being accepted by creditors in the retail marketplace. They are referred to as PinnacleSM, FICO Risk Score or Advanced Risk Score.

Limitations of FICO score - Along with the effectiveness of FICO scores, there remains certain drawbacks in the system. Some of them have been covered below

• To calculate a FICO score, at least one credit account must be open and active for a minimum of 180 days
• Different credit reporting agencies such as Equifax, Experian and Trans Union may report different FICO score for the same individual because of inconsistent information
• Due to a considerable portion of the credit score related to credit history, persons with thin files or with no previous experience in handling credit will return very low scores

As people root for a more error-free and flexible scoring system, new alternatives to FICO score have come up - the newest one being VantageScore. All said and done, FICO score enjoys popularity and reputation amongst creditors, which is why it will be hard to substitute it in near future.

Common Credit Report Errors

The fact that a good Credit Report is the passport to financial freedom is common knowledge. But on the contrary, a stained report can close all avenues. Errors in credit report are not always intentional. And so it is wise to check your credit report before you apply for a new credit. It lets you discover error(s) in your credit report. Credit report errors are not uncommon but they can be very harmful. The good thing about the errors is that they usually show up in all the three credit reports from the three credit bureaus - but that’s because the wrong information has passed onto all of them. The dark side is the errors will be visible in all the reports which might make them realistic when they are not.

Are there really errors in my credit report - There is a moderate percentage of errors in many consumer credit reports and so you should not be shocked if you find errors on your credit report. It is better to think about correcting the errors than wasting time in awe. The faster you spot it, the more time you will have in your hands to put it right in the next credit report. And this is possible only when you check your credit report, regularly.

Some very common credit report errors - Below is a list of the most common errors in a credit report. Once you get hold of your credit reports, look for these first.

* Nonpayment of a loan or debt
* Wrong information of credit card account
* Confusing reports of transactions done by other family members on your report
* Information related to false accounts opened without your approval especially in case of identity theft

Why do such errors occur - Most mistakes can be because of wrong information supplied by your present or past creditors. There are more than 30,000 data processors which collect and process almost 5 billion updates to credit reports every month. This system is automatic and errors can naturally creep into the system. Other reasons are due to human errors while collecting information. Identity thefts can also lead to erroneous information on your credit report.

How errors can hurt me - Even small credit report errors can cost you extra dollars as they may reduce your creditworthiness in the form of Credit Scores and increase your interest rates. It has been found that by timely corrections of credit report errors - many were benefited while opting for mortgage or car loans or even insurance. Banks, insurance companies and even employers increasingly are turning to credit reports to determine what kind of rates you should pay and whether you should be hired for a job. Almost one third of the employers use credit reports in the pre-employment screening process.

Fastest way of spotting errors - Simply get regular credit reports. As a consumer, you are now entitled to free copies of credit reports from each of the three major credit reporting bureaus once in every 12 months. In addition to them you can get unlimited credit reports from other trusted companies which specialize in credit reports. As soon as they arrive, go through the reports minutely as if your life depended on it. Re-check every small and apparently unimportant info like account numbers and expected transactions. Pay special importance to late payments, repossessions or accounts that do not belong to you. Note down every small doubt that crops in your mind and then match them with your own records.

Correct them now - Each credit report will provide you with thorough contact information and instructions on correcting credit report errors. The credit reporting bureau(s) can take a maximum of 60 days to investigate and correct the errors on your report. By federal law and FCRA, credit bureaus are bound to look into all the disputed information in credit reports.

Errors in credit report can lead to the false impression that you don’t pay your lenders well - while in reality you may be doing exactly the opposite by dealing with your credits first. Don’t let the errors take you for a ride - correct them immediately.

Vantage Credit Score: How Is It Calculated?

Consumers in the US are more used to the word FICO when it comes to Credit Scores. However, since change is inevitable for development in all walks of life, Credit Scores are no exception. The law of competition may be sometimes hard for the individual, it is best for the race, because it ensures the survival of the fittest in every department. Consequently, we have promising scores like Vantage that aims at standardization clubbed with other advantages.

When the 3 national credit bureaus Equifax, Experian, and TransUnion recently announced a joint venture to produce a new credit score for businesses and consumers called the Vantage Score - some interests were affected. The three credit bureaus have previously competed with each other in providing credit report and related products to consumers and businesses. The bureaus collected information and separately used them in their own version of the FICO model (Fair Isaac Model). But things are going to change now. Let us take you through the tracks as the battle between the new and old starts to take shape…

What Is Vantage Score - As a creditor, the foremost worry that is on their minds is repayment. No matter how much money they get and how much they credit, whenever a new person asks for credit - they look for what we call creditworthiness. This is where credit scores come into the fore. They actually measure your chances of paying it back. It’s that simple. The VantageScore has been constructed after reviewing the credit histories of 15 million credit files from each credit bureau. By looking at them, the VantageScore developers statistically measured the factors that may predict default (non-payment). Like FICO score, VantageScore predicts which consumer has a higher chance of defaulting.

Understanding Vantage Score - Under the old system credit scores ranged from 350 - 850, with higher scores indicating a higher level of creditworthiness. With Vantage Score higher scores still mean more creditworthiness and a letter will be assigned. In the new score system, 901 - 990 will mean A, 801 - 900 = B, 701 - 800 = C, 601 - 700 = D and 501 - 600 = F. It has often been the case that 3 different credit scores have meant that as a consumer you are left baffled. As a result, creditors have taken advantage of your confusion and lent you at higher rates. With the new system of grades - the confusion will be over. Creditors can no longer charge you for a drop of 10 points and hand out higher interest rates than another guy with a score just shade higher. It was never about the points but being proven that you are credit-worthy. Earlier scoring models had failed to fill this gap, which was being exploited by some creditors with their own custom scores. Now a guy with 698 and another gentleman with 679 cannot be treated differently. They are both creditworthy individuals and should be respected for being able to maintain decent credit history.

How Is Vantage Different From FICO Score - The VantageScore will use the same scoring criteria for all the three national credit bureaus. As a result, across credit bureaus scores will come as being steadier and less erratic. It is no secret that FICO scores use a complex formula where they have as much as 30 variables. With VantageScore, any score differences for the same consumer will be attributed to content (read information differences) and not the scoring formula. With the VantageScore even lenders will be able to use the scores to easily separate their creditworthy clients down from the most to the least risk segments. The only logical doubt expressed against the new system deals with the accuracy of data gathered. Unfortunately, the old system suffered from the same problem. FICO scores are popular as they have acceptance and have been prevalent for many years. But the need for a more transparent and consistent scoring system has brought forward VantageScore.

Competition Is Always Good - Fair Isaac scores face the age-old battle of the old lion fighting out against the young cub. A little competition is a good thing and the accuracy of VantageScore system will be tested time and again. FICO scores do have popular support (in creditors) but if Vantage manages to predict the creditworthiness of individuals better - the battle will be won in no time. The first steps have been already taken with people with no previous credit history ((thin files) being given decent scores - something FICO scores were unable to in all these years. However, ultimately it is the Credit Report that becomes decisive no matter which score is used. So, keep checking your reports at regular intervals.