January 28,2009
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What to Believe About Credit Scores, Pt.2
– What are FICO's Credentials?-
How do they come up with these scores?: As advised by the FICO board (at Fair Isaac & Co.) the following guidelines have been issued, listing five categories and their suggested ‘weighting factors' (significance):
> Credit card payment history: 35%
> Amounts owed on the credit card: 30%
> Length of credit card history: 15%
> New credit card accounts opened: 10%
> Types of credit cards (major or private label, etc.): 10%-
Who are they, to decide my creditworthiness?: The credit card industry has found that this system works the best for everyone all around. For one thing, it's very efficient, which makes for mush quicker decisions on credit card loans. For another, it has survived widespread testing over time. Still, another reason is that it eliminates personal bias on such things as; race, gender, marital status, religion and even, nationality. Not only is this perceived to be more fair to the public but, it also takes the heat off private credit card lenders from fear of reprisal from divisive and frivolous lawsuits. With one set of standards, results are also much more measurable and predictable.
In less-chaotic times then today, predictions were very safe that a person with a better FICO could be depended on to make their credit card payments on time, to not get in debt over their head and to not mis-use credit in general.
Conversely, it was also quite predictable that someone with a low FICO Score would, sooner or later, ‘mess up'. ‘Messing up', of course, is the ‘raison d'etre' of the risk system in the first place. Using proper ‘weighting factors', more meaningful criteria can sort out which categories are more important than others. Some things like closing credit card accounts properly aren't as significant as running 90-days late on a credit card payment. The good news is that a person can take measures and, over time, restore a good credit rating, gone bad.
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