In 1989 FICO installed the first scoring system at Equifax named Beacon. In 1991 FICO began a credit risk scoring system at all three national credit bureaus, Beacon at Equifax, Empirica at TransUnion and the Experian/Fair Isaac model at Experian. Like the tightly guarded formula for Coca Cola, very few people (even key employees) know the precise algorithm for determining one’s credit score.
The scores range from 350 to 850. The score compares a consumer’s habits in accumulating and repaying debt. The score indicates to a prospective creditor the level of risk it is taking to extend a consumer credit. Reviewing a credit report allows creditors the ability to review a person's spending habits over 7 to 10 years; the credit score provides a “quick and dirty” analysis, and is less subjective. The formula reduces points based on risk parameters, and the resulting score is compared to a model with similar profiles. Each time a creditor runs a credit report, a consumer’s FICO score is reduced by 2 to 6 points. The resultant score classifies a consumer as more or less credit worthiness or riskiness. or how likely someone will repay a debt in a timely manner.
Until recently, credit scores were not available to consumers. In 2001, two cases in California courts, pressure from the United States Congress, industry and consumer advocates have now made FICO scores available to the public. Lenders are now required to give you access to your score when you apply for a loan. Eligibility for an annual free credit report is determined by your state of residence based on the rollout schedule set by federal law: commencing December 1, 2004 with residents in the Western United States, March 1, 2005 residents of the Midwestern States, June 1, 2005 residents of the Southern States, and finally September 1, 2005 residents of the Eastern States and U.S. Territories. For more information go to www.annualcreditreport.com or call 877.322.8228 for more specifics.
By the Numbers
A credit score below 620 is considered by many financial institutions to be “sub-prime,” and because of this requires one to seek a loan from a sub-prime lender who will add points to the interest rate.
Credit scores that fall between 620 and 640 are considered conforming credit scores. In this range, a borrower will be able to obtain basic credit. Things one can do to improve his score in this area is to look at the level of credit card debt. Try to keep credit card balances below 25 to 40 percent of the high limit, using a home equity loan can help keep this in check, and the interest may be deductible. You should always be aware of the debt to limit ratio on revolving accounts. There are two methods to reduce to enhance your score: Firstly, you can reduce your outstanding debt, or secondly, increase your credit limit. It only takes a debt ratio of 75% on one or two credit cards can weigh down your score, and cause you to pay higher interest and fees for credit.
Ideally, one should strive for a score of 720 or greater. Lenders provide the best terms for such borrowers.
What to do?
Contact each of the three national credit reporting agencies:
You will see instructions on their web sites for filing disputes regarding errors.
If an error was caused by misinformation supplied by a creditor, you should contact that creditor in writing requesting letter absolving the error. If that does not work, send a letter of 100 words or less to each of the three credit reporting agencies explaining the dispute, and request that it be appended to your credit report. Therefore, each subsequent creditor or prospective creditor who examines your report will also see your statement.
Under the Fair Credit Reporting Act, the credit bureaus must correct erroneous information within a reasonable amount of time, which is usually considered within 30 days. If you find yourself in a longer period, you should contact the Federal Trade Commission at 877.382.4357 to file a complaint. If that does not work, you can also contact an attorney who specializes in consumer protection issues. There are consultants who specialize in credit repair or restoration. It is advisable to proceed with caution, as unfortunately some people prey on those desperate for credit. If you do decide to pursue this avenue, it is best to get a recommendation from someone who has used his or her services.
Finally
A great credit score comes over time. When a consumer reviews his own credit report, using the three major bureaus does not diminish his score. It is prudent practice to check your own score periodically, to find any inaccuracies or evidence of identity theft. |
