If you are serious about rebuilding your credit in the fastest possible time, you need to learn how your credit rating is determined.
Much of the credit rating in this country is done by a California company named the Fair Isaac Corporation (FICO). It licenses its program to determine credit- worthiness to the three big credit bureaus and other businesses that may want to determine whether or not to make loans to someone.
Fair Isaac was one of the first and best companies to use complex mathemat- ical algorithms, crunched on computers to predict borrow ers’ future actions.
Developing consumer financial profiles produces a large part of the company’s
$270–$280 million revenue. To protect this income stream, it has tried hard to keep the factors that are considered in its algorithms and how they are
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multiplied a secret. For this reason, any one writing on credit rebuilding prior to June 2000 relied purely on intuition, observation, and guesswork.
Fair Isaac scores are used by about 75% of the country’s mortgage lenders and all three major credit bureaus. Each bureau has its own name for the score, but they are all based on the Fair Isaac score. These scores have been used for decades in consumer loans and credit cards under a heavy veil of secrecy. But, controversy developed as the score method moved into the mortgage industry. All aspects of people’s lives were being controlled by a small group in California without accountability and in total secrecy.
The reason Fair Isaac gave for its secrecy was that the public needed more than just their scores to understand their credit standing and how to improve it—they needed additional information and individual counsel from a lender. Of course, this ignored the fact that no lender was giving any additional information to the consumer to tell him or her how to improve his or her score.
In fact, Fair Isaac’s entire business depends on this information not coming out.
If consumers know exactly how the scores work, they can change their actions and standing and undercut the predictive value of the product the company is selling. Likewise, if the information gets out, competitors can gain insight into the formulas and factors that the company is selling.
This raw display of power created a disturbance, and at last state governments and the Federal Trade Commission (FTC) got involved. The California Senate began to consider whether to pass a law to make Fair Isaac reveal all. In July 1999, Fair Isaac made a pres entation of some of the factors used in determining a consumer’s cred it score. It gave examples of twelve factors and how differences in them would give different points. The higher the score, the more creditworthy one is.
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12 Examples of Factors that Determine a Person’s FICO Score
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(The first line in each block is the individual’s status. The second line is the points allocated for that status.) Years on
Job
Own 25
Occupation Years at Address
Department Store/Major Credit Cards Bank Reference Own/Rent
Semi- Professional
Major Credit Card16
Debt Ratios Number Inquiries Years in File Revolving Trades
% Balances Available
<15 22
Derogatory Description
<0.5 12 Professional 50<0.5 2 None 0 Checking 5
0 3
<0.5 0 0 5 0–15%
15 No Record 0
Rent 150.5–2.49 10
440.5–1.49 8Department Store 11 Savings 10 15–25 15 1 11 1–2 5 1–2 12 16–30%
5
29 Any Derog- atory Descrip- tion
Other 10 2.5–6.49 15 Manager 311.5–2.49 19
Both 20 26–35 12
2 3 3–4 15 3–5 8 31–40%
-3 Any Slow
-14
No Info 176.5–10.49 19 Office
29 2.5–5.49 25Both
27 Other 11 36–49 5
3 -7 5–7 30 6+
-4 41–50%
-10 1 Satis- factory Line 17
2 Satis- factory Lines 24 50% + -18 8+
40 10.49+
23 Blue Collar 25 5.5–12.49 30 No Answer
10 No Info 9 50+
0 4 -7
No Info Retired13
31 12.5+
39No Info
12
No Info 13 5–9 -20
3 Satis- factory Lines 29
Other 22 Retired 43
No Info 0
No Info 27 No Info
20
Worst Credit Number of
For more information, see the FTC website at www.ftc.gov. Clearly, these twelve factors are not all the factors. Fair Isaac once stated that even a sim ple credit scoring system is likely to have 10,000–20,000 different possible combinations.
The total scores range from 300 to 900 points. This means that the few elements given in the government briefing cover only a part of this possible score range.
Fair Isaac claims that it only uses financial information in its credit scoring formula. Factors such as the part of town one lives in, race, sex, and nation-
ality are not considered. Some people doubt this claim—Fair Isaac once said age was not considered, but the data it presented at the briefing uses years in the credit file as a proxy, and one of its slides lists age as a factor in evaluating the credit applicant.
As you look at the sample chart, you will see that there are many factors you cannot affect in your efforts to rebuild your credit standing. But there are several things you can do.
• Stay at one address and do not move around a lot.
• When you do obtain credit, make timely payments.
• Do not switch jobs too often.
• If you are running your own business, especially if it is a new business, you may wish to consider taking a part-time job so your report shows employment with the steady income.
You can obtain a copy of your FICO score by using the Internet. This can be obtained through a website maintained by Fair Isaac, as well as one maintained by Equifax. The Fair Isaac site is www.myfico.com.