FICO CREDIT SCORE

FICO scores range from about 300 to 850 and exhibit a left-skewed distribution with a US median around 725 and an average of 675. A score above 720 is considered to be "good credit," and a score below 620 is considered to be sub-prime. Fico Scores/Reports A difference of 3% for the average $150,000 home mortgage could mean more than $100,000 in extra interest to the sub-prime borrower over the life of the loan .

Supposed Factors in Credit Score

FICO scores and its variants are designed to estimate the risk of default. Although the exact formula for calculating the FICO score is a closely guarded secret, Fair Isaac has disclosed the following components and the supposed approximate weighted contribution of each:

• 35% punctuality of payment in the past
• 30% capacity used: balances owed to total available credit
• 15% length of credit history
• 10% types of credit used (installment, revolving, consumer finance)
• 10% recent search for credit and/or amount of credit obtained recently

Credit Score Models

The official percentages provide very little value in understanding a FICO credit score. For example, the 10% of the score allocated to "types of credit used" is undefined, leaving consumers unaware what type of credit mix to pursue. "Length of credit history" is also a murky concept; it consists of multiple factors, two being the oldest account open, the average length of time an account has been open. Although only 35% is attributed to punctuality, if a consumer is substantially late on numerous accounts, his score will fall far more than 35%. Bankruptcies, foreclosures, and judgments have a big affect on credit scores but are not even included in the simplistic explanation from Fair Isaac.

There are several generally accepted algorithms for extracting the primary contributing factors to a low credit score. One or more of these algorithms is typically used to supply a list of reasons when a loan applicant has been denied credit so that the lender can satisfy Regulation B. These adverse action reasons are disingenuous, as the only determining factor for credit denials is a numeric score — the "reasons" are provided only to satisfy the consumer....Continue Reading