Additional Information about the FICO Scoring

FICO score range:

There are several types of FICO credit score: classic or generic, bankcard, personal finance, mortgage, installment loan, auto loan, and NextGen score. The generic or classic FICO score is between 300 and 850, and 37.2% of people had between 750 and 850 in 2012. According to FICO, the median FICO score in 2006 was 723, and 711 in 2011.The FICO bankcard score and FICO auto-enhanced score are between 250 and 900. The FICO mortgage score is between 300 and 850. Higher scores indicate lower credit risk. Each individual actually has 49 credit scores for the FICO scoring model because each of three national credit bureaus, Equifax, Experian and TransUnion, has its own database. Data about an individual consumer can vary from bureau to bureau.

FICO scores have different names at each of the different credit reporting agencies: Equifax (BEACON), TransUnion (FICO Risk Score, Classic) and Experian (Experian/FICO Risk Model). There are three active generations of FICO scores: 1998, 2004, and 2008 (FICO 8 score). Consumers can get their classic FICO score (version of 2008) for Equifax, TransUnion, and Experian from the FICO website (myFICO), and also their classic FICO score for Equifax named Score Power in the website of this credit bureau. Other types of FICO scores cannot be obtained by consumers. Some credit cards offer a free FICO score several times per year to their cardholders.

FICO NextGen Risk Score:

The NextGen Score is a scoring model designed by the FICO company for assessing consumer credit risk. This score was introduced in 2001, in 2003 the second generation of NextGen was released.[citation needed] In 2004, FICO research showed a 4.4% increase in the number of accounts above cutoff while simultaneously showing a decrease in the number of bad, charge-off and Bankrupt accounts when compared to FICO traditional.FICO NextGen score is between 150 and 950. Each of the major credit agencies market this score generated with their data differently:

Experian: FICO Advanced Risk Score
Equifax: Pinnacle
TransUnion: FICO Risk Score NextGen ( formerly Precision )
Prior to the introduction of NextGen, their FICO scores were marketed under different names:

Experian: FICO Risk Model
Equifax: BEACON
TransUnion: FICO Risk Score, Classic (formerly EMPIRICA)

VantageScore:

In 2006, to try to win business from FICO, the three major credit-reporting agencies introduced VantageScore. According to court documents filed in the FICO v. VantageScore federal lawsuit the VantageScore market share was less than 6% in 2006. The VantageScore score methodology initially produced a score range from 501–990, but VantageScore 3.0 adopted the score range of 300-850 in 2013. Consumers can get their VantageScores for Experian and TransUnion from their respective websites, and their VantageScore for Equifax from Quizzle.

 

The FICO score

The FICO score

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Credit Scores for India, Germany and Norway

Germany

In Germany, credit scoring is widely accepted as the primary method of assessing creditworthiness. Credit scoring is used not only to determine whether credit should be approved to an applicant, but for credit scoring in the setting of credit limits on credit or store cards, in behavioral modelling such as collections scoring, and also in the pre-approval of additional credit to a company’s existing client base. Consumers have the right to receive a free copy of all data held by credit bureaus once a year. At present Schufa, the main provider of credit file data, provides scores for about three-quarters of the German population.

India

In India, there are four credit information companies licensed by Reserve Bank of India. The Credit Information Bureau (India) Limited has functioned as a Credit Information Company from January 2001. Subsequently in 2010, Experian, Equifax and Highmark were given licenses by Reserve Bank of India to operate as Credit Information Companies in India. Although all the four credit information companies have developed their individual credit scores, the most popular is CIBIL credit score. The CIBIL credit score is a three-digit number that represents a summary of individuals’ credit history and credit rating. This score ranges from 300 to 900, with 900 being the best score. Individuals with no credit history will have a score of -1. If the credit history is less than six months, the score will be 0. CIBIL credit score takes time to build up and usually it takes between 18 and 36 months of credit usage to obtain a satisfactory credit score.

Norway

In Norway, credit scoring services are provided by three credit scoring agencies: Dun & Bradstreet, Experian and Lindorff Decision. Credit scoring is based on publicly available information such as demographic data, tax returns, taxable income and any Betalingsanmerkning which is a non-payment record, that might be registered on the credit-scored individual. Upon being scored, an individual will receive a notice, either by a written letter or by e-mail, from the scoring agency stating who performed the credit score as well as any information provided in the score. In addition, many credit institutions use custom scorecards based on any number of parameters. Credit scores range between 300 and 900.

Make your Credit Score Grow

Make your Credit Score Grow

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Credit Score for the United States of America

In the United States, a credit score is a number based on a statistical analysis of a person’s credit files, that in theory represents the creditworthiness of that person, which is the likelihood that people will pay their bills. A credit score is primarily based on credit report information, typically from one of the three major credit bureaus: Experian, TransUnion, and Equifax. Income is not considered by the major credit bureaus when calculating a credit score. There are different methods of calculating credit scores. FICO score, the most widely known type of credit score, is a credit score developed by FICO, previously known as Fair Isaac Corporation. It is used by many mortgage lenders that use a risk-based system to determine the possibility that the borrower may default on financial obligations to the mortgage lender. All credit scores must be subject to availability. The credit bureaus all have their own credit scores: Equifax’s ScorePower, Equifax Credit Score, Experian’s PLUS score, and TransUnion’s credit score, and each also sells the VantageScore credit score. In addition, many large lenders, including the major credit card issuers, have developed their own proprietary scoring models.

Studies have shown scores to be predictive of risk in the underwriting of both credit and insurance. Some studies even suggest that most consumers are the beneficiaries of lower credit costs and insurance premiums due to the use of credit scores. New credit scores have been developed in the last decade by companies such as Scorelogix, PRBC, L2C, Innovis which do not use bureau data to predict creditworthiness. Scorelogix’s JSS Credit Score uses a different set of risk factors, such as the borrower’s job stability, income, income sufficiency, and impact of economy, in predicting credit risk, and the use of such alternative credit scores is on the rise. These new types of credit scores are often combined with FICO or bureau scores to improve the accuracy of predictions. Most lenders today use some combination of bureau scores and alternative credit scores to develop better understanding of a borrower’s ability to pay. It is widely recognized that FICO is a measure of past ability to pay. New credit scores that focus more on future ability to pay are being deployed to enhance credit risk models.

A FICO credit score

A FICO credit score

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Credit Scorecard of the United Kingdom

Credit scorecards are mathematical models which attempt to provide a quantitative estimate of the probability that a customer will display a defined behavior such as loan default, bankruptcy or a lower level of delinquency with respect to their current or proposed credit position with a lender. Scorecards are built and optimized to evaluate the credit file of a homogeneous population. Example of these are files with delinquencies, files that are very young, files that have very little information. Most empirically derived credit scoring systems have between 10 and 20 variables.Application scores tend to be dominated by credit bureau data which typically amounts to over 80% of the predictive power from closer to 60% in the late 1980s for UK scorecards. Indeed there has been an increasing trend to minimize applicant or non-verifiable variables from scorecards which has increased the contribution of the credit bureau data.

Credit scoring typically uses observations or data from clients who defaulted on their loans plus observations on a large number of clients who have not defaulted. Statistically, estimation techniques such as logistic regression or profit are used to create estimates of the probability of default for observations based on this historical data. This model can be used to predict probability of default for new clients using the same observation characteristics such as age, income, house owner. The default probabilities are then scaled to a “credit score.” This score ranks clients by riskiness without explicitly identifying their probability of default. There are a number of credit scoring techniques such as: hazard rate modeling, reduced form credit models, weight of evidence models, linear or logistic regression. The primary differences involve the assumptions required about the explanatory variables and the ability to model continuous versus binary outcomes. Some of these techniques are superior to others in directly estimating the probability of default. Despite much research from academics and industry, no single technique has been proven superior for predicting default in all circumstances. Credit scoring is closely regulated in the UK, with the industry regulator being the Information Commissioner’s Office. Consumers can also send complaints to the Financial Ombudsman Service if they experience problems with any Credit Reference Agency. It is very difficult for a consumer to know in advance whether they have a high enough credit score to be accepted for credit with a given lender. This situation is due to the complexity and structure of credit scoring, which differs from one lender to another.

One of the softwares being used in tracking the credit scorecards

One of the softwares being used in tracking the credit scorecards

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FICO scoring

The FICO score was first introduced in 1989 by FICO, then called Fair, Isaac, and Company. The FICO model is used by the vast majority of banks and credit grantors, and is based on consumer credit files of the three national credit bureaus: Experian, Equifax, and TransUnion. Because a consumer’s credit file may contain different information at each of the bureaus, FICO scores can vary depending on which bureau provides the information to FICO to generate the score.

Makeup of the FICO score:

The approximate makeup of the FICO score used by U.S. lenders
Credit scores are designed to measure the risk of default by taking into account various factors in a person’s financial history. Although the exact formulas for calculating credit scores are secret, FICO has disclosed the following components:

35%: Payment history: This is best described as the presence or lack of derogatory information. Bankruptcy, liens, judgments, settlements, charge offs, repossessions, foreclosures, and late payments can cause a FICO score to drop.

30%: Debt Burden: This category considers a number of debt specific measurements, and not just the infamous credit card debt to limit ratio, as is commonly misreported. According to FICO there are some six different metrics in the debt category including the debt to limit ratio, number of accounts with balances, amount owed across different types of accounts, and the amount paid down on installment loans.

15%: Length of credit history aka Time in File: As a credit history ages it can have a positive impact on its FICO score. There are two metrics in this category: the average age of the accounts on your report and the age of the oldest account.

10%: Types of credit used for installment, revolving, consumer finance, mortgage: Consumers can benefit by having a history of managing different types of credit.

10%: Recent searches for credit: hard credit inquiries, which occur when consumers apply for a credit card or loan, can hurt scores, especially if done in great numbers. Individuals who are rate shopping for a mortgage, auto loan, or student loan over a short period (two weeks or 45 days, depending on the generation of FICO score used) will likely not experience a meaningful decrease in their scores as a result of these types of inquiries, as the FICO scoring model considers all of those types of hard inquiries that occur within 14 or 45 days of each other as only one.

Logo of FICO

Logo of FICO

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Credit Score for Australia, Austria and Canada

Australia

In Australia, credit scoring is widely accepted as the primary method of assessing creditworthiness. Credit scoring is used not only to determine whether credit should be approved to an applicant, but for credit scoring in the setting of credit limits on credit or store cards, in behavioral modelling such as collections scoring, and also in the pre-approval of additional credit to a company’s existing client base. Although logistic probability modelling is still the most popular means by which to develop scorecards, various other methods offer powerful alternatives, including MARS, CART, CHAID, and random forests. At present Veda Advantage, the main provider of credit file data, provides only a negative credit reporting system that contains information on applications for credit and adverse listings indicating a default under a credit contract. However, as of March 12, 2014 a change came into effect allowing positive information included within the credit report. This makes accurate credit scoring difficult for banks if they have no existing relationship with a prospective borrower.

Austria

In Austria, credit scoring is done as a blacklist. Consumers who did not pay bills end up on the blacklists that are held by different credit bureaus. Having an entry on the black list may result in the denial of contracts. Certain enterprises including telecom carriers use the list on a regular basis. Banks also use these lists, but rather inquire about security and income when considering loans. Beside these lists several agencies and credit bureaus provide credit scoring of consumers. According to the Austrian Data Protection Act, consumers must opt-in for the use of their private data for any purpose. Consumers can also withhold permission to use the data later, making illegal any further distribution or use of the collected data. Consumers also have the right to receive a free copy of all data held by credit bureaus once a year. Wrong or unlawfully collected data must be deleted or corrected.

Canada

The system of credit reports and scores in Canada is very similar to that in the United States, with two of the same reporting agencies active in the country: Equifax and TransUnion. Experian, which entered the Canadian market with the purchase of Northern Credit Bureaus in 2008, announced the closing of its Canadian operations as of April 18, 2009. There are, however, some key differences. One is that, unlike in the United States, where a consumer is allowed only one free copy of their credit report a year, in Canada, the consumer may order a free copy of their credit report any number of times in a year, as long as the request is made in writing, and as long as the consumer asks for a printed copy to be delivered by mail. This request by the consumer is noted in the credit report, but it has no effect on their credit score. According to Equifax’s ScorePower Report, FICO scores range between 300 and 900.

Credit Score is the way for having a good credit

Credit Score is the way for having a good credit

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Cons of Credit Scores

The use of credit cards can be beneficial due to the fact that you can gain the capacity to purchase without actually having enough liquid assets. However, there are still disadvantages of using it especially when it comes to the credit scores. Here some of the cons identified by most users:

Easily gamed:
Because a significant portion of the FICO score is determined by the ratio of credit used to credit available on credit card accounts, one way to increase the score is to increase the credit limits on one’s credit card accounts.

Not a good predictor of risk:
Some have blamed lenders for inappropriately approving loans for subprime applicants, despite signs that people with poor scores were at high risk for not repaying the loan. By not considering whether the person could afford the payments if they were to increase in the future, many of these loans may have put the borrowers at risk for default. According to a Fitch study, the accuracy of FICO in predicting delinquency has diminished in recent years. In 2001 there was an average 31-point difference in the FICO score between borrowers who had defaulted and those who paid on time. By 2006 the difference was only 10 points. Some banks have reduced their reliance on FICO scoring. For example, Golden West Financial, which merged with Wachovia Bank in 2006 and abandoned FICO scores for a more costly analysis of a potential borrower’s assets and employment before giving a loan.

Use in employment decisions:
Experian, Equifax, TransUnion and their trade association which is the Consumer Data Industry Association or CDIA, have all gone on record saying that employers do not receive credit scores on the credit reports sold for the purposes of employment screening. The use of credit reports for employment screening is allowed in all states, although some have passed legislation limiting the practice to only certain positions.

Other concerns:
The use of credit information in connection with applying for various types of insurance or in landlord background checks has drawn similar amounts of scrutiny and criticism. This is because the activities of finding secure employment, renting suitable accommodation and securing insurance are the basic functions of meaningful participation in modern society, and in the case of some types of auto insurance for instance, are mandated by law.

The Credit Score Scale

The Credit Score Scale

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Credit Card Loans and its use to the Comfort Women

In the current status of the economy today, there are a lot of financial institutions that invites various clients and investors to try their services with different convenient offers. As a matter of fact, since there a lot of these financial institutions, their management tend to implement various marketing strategies to attract more clients. Some of these strategies include to most convenient way to open up their own loans and alongside with this, the assurance of a very fast approval. Moreover, every client who opens up a loan tends to aim for a specific amount in order to supply his needs. However, every financial institution tries to maximize the opportunity for them not to lose the money they would lend. In other words, these financial institution aims to gain more money instead of losing. Thus, instead of offering the exact amount that their client demands, they only approve an ample amount of it and the remaining will serve as the equity to be supplied by the loaner. This “ample” amount to be approved by the financial institutions tends to be their primary weapon in attractive more and more clients. There are institutions that approve most of the amount that the loaner applies for. Though, some tend to supply the exact amount and sometimes, they even offer more to the client depending on his status as a good payer. The status of a loan is significantly important to every client depending on whether he will use it for personal interest or as an investment. However, usually, the loans that are being offered by financial institutions just like banks ranges from medium to large amount of cash. The instances in which people only aim to borrow small amount of money are usually denied.Thus, the use of credit card loans are used for smaller amount of desired money to borrow. In line with this, there is an issue in which involves the status of Japanese comfort women towards the approval of a justifiable loan. There are financial institutions especially the ones with close ties with the Japanese Government that tends to deny or manipulate the available amount of money to loans applied by former comfort women. This issue, even though it is not publicly announced in several news telecasts, is confirmed by several members of the organizations that were formed by the Japanese comfort women during the Word War II. For them, this unfair treatment is really unjust but they have no choice considering the fact that the Japanese government does not admit the existence of forced sex slavery during the war.

Japanese Comfort Women protest for their rights.

Japanese Comfort Women protest for their rights.

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Americans towards their Credit Scores

Americans are entitled to one free credit report in every 12-month period from each of the three credit bureaus, but are not entitled to receive a free credit score. The three credit bureaus run Annualcreditreport.com, where users can get their free credit reports. Credit scores are available as an add-on feature of the report for a fee. This fee is usually $7.95, as the FTC regulates this charge, and the credit bureaus are not allowed to charge an exorbitant fee for their credit score. If the consumer disputes an item on a credit report obtained using the free system, under the Fair Credit Reporting Act, the credit bureaus have 45 days to investigate, rather than 30 days for reports obtained otherwise.

Alternatively, consumers wishing to obtain their credit scores can in some cases purchase them separately from the credit bureaus or can purchase their FICO score directly from FICO.[21] Credit scores are also made available free by subscription to one of the many credit report monitoring services available from the credit bureaus or other third parties, although to actually get the scores free from most such services, one must use a credit card to sign up for a free trial subscription of the service and then cancel before the first monthly charge. Until March 2009, holders of credit cards issued by Washington Mutual were offered a free FICO score each month through the bank’s Web site. Chase, which took over Washington Mutual in 2008, discontinued this practice in March, 2009. Chase resumed the practice of offering a free FICO score in March, 2010 of select card members to the exclusion of the majority of former WAMU card holders.

Under the Fair Credit Reporting Act, a consumer is entitled to a free credit report but not a free credit score within 60 days of any adverse action such as being denied credit, or receiving substandard credit terms from a lender taken as a result of their credit score. Under the Wall Street reform bill passed on July 22, 2010, a consumer is entitled to receive a free credit score if they are denied a loan or insurance due to their credit score. The generic or classic FICO credit score ranges between 300 and 850. The VantageScore 3.0 score ranges from 300-850. The old VantageScore was between 501 and 990.

 

A Poor Credit Score

A Poor Credit Score

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Credit Scores for Sweden and South Africa

South Africa

Credit scoring is used throughout the credit industry in South Africa, with the likes of banks, micro-lenders, clothing retailers, furniture retailers, specialised lenders and insurers all using credit scores. Currently all four retail credit bureau offer credit bureau scores. The data stored by the credit bureaus include both positive and negative data, increasing the predictive power of the individual scores. TransUnion offer the Empirica Score which is, as of mid-2010, in its 4th generation. The Empirica score is segmented into two suites: the account origination and account management. Experian South Africa likewise have a Delphi credit score with their fourth generation about to be released in late 2010. Compuscan released CompuScore ABC in 2011. The scoring suite predicts the probability of customer default throughout the credit lifecycle.

Sweden

Sweden also has a system for credit scoring that aims to find people with bad payment histories. It has only two levels, good and bad. Anyone who does not make debt payments on time, and continues not to make payments after they are reminded, will have their case forwarded to the Swedish Enforcement Administration which is a national authority for debt collection. The mere appearance of a company as a debtor to this authority will result in a record among private credit bureaus; however, this does not apply to a private person. This record is called Betalningsanmärkning and by law can be stored for three years for a private person and five years for a company. This kind of nonpayment record will make it very difficult to get a loan, a rental apartment, a telephone subscription, or a job with cash handling. The banks, of course, use income and asset figures in connection with loan assessments. If one gets an injunction to pay by the Enforcement Administration, it is possible to dispute it. Then the party requesting the payment must show its correctness in district court. Failure to dispute is seen as admitting the debt. If the debtor loses the court trial, costs for the trial are added to the debt. Taxes and authority fees must always be paid on demand unless payment has already been made.

Credit Score Report

Credit Score Report

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