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					 FICO Scoring
Cracking the Secret Code




                           1
         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.                          2
    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


                                      3
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.
                         4
Where does the Credit
 Report come from?
              Creditors




                               Local
Consumer                      Credit
                              Bureaus



            National Credit     Credit Report
           Reporting Agency
                                            5
  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)



                                        6
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



                                       7
Caution – Results May Vary
              • Scores vary
                from agency to
                agency
              • Scores vary
                from lender to
                lender
              • Different
                editions of FICO
                                   8
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%
                                  9
        Risk of Default

100%
80%
60%
40%
20%
 0%
       up to 500- 550- 600- 650- 700- 750+
       499 549 599 649 699 749
                                             10
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
                                    11
         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. 12
Who’s Keeping Score?

          •   Lenders
          •   Insurers
          •   Landlords
          •   Employers
          •   Cell Phone
              Carriers

                           13
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


                                          14
       What is the True Cost?
Emily with a FICO of 750
Mortgage of $350,000
Interest Rate 5.5%
Monthly Payment $1,987
10-Year Int. Paid $174,760
                       Sally with a FICO of 650
                       Mortgage of $350,000
                       Interest Rate 7.375%
                       Monthly Payment $2,417
                       10-Year Int. Paid $243,020
                       Sally’s Penalty $68,261 15
       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.




                                             16

				
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posted:3/18/2011
language:English
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