Credit Articles en Copyright 2009 2009-05-19T22:19:02+00:00 Fair Isaac Invented the FICO Score—They’ve Also Patented How to Explain a Credit Score Does anyone really understand what goes into your FICO score?  I would hope that someone at Fair Isaac Corporation (the company that invented the FICO score) would know.  You’d also think they would know how to explain your FICO score to you.  Well, we’ve found out that it isn’t that simple (in fact, it’s so complicated that they’ve patented an approach for explaining your credit score!).

The company Fair Isaac Corporation is well known as having invented the FICO score.  But did you also know that they invented a process for explaining your credit score?  Yes, it’s strange, but (unfortunately) true.  Here’s a copy of the front page of the patent.  (You can view the full patent here).image

Fair Isaac Corporation is the proud owner of U.S. Patent Number 7,280,980 entitled “Algorithm for explaining credit scores”.  The patent specification discusses how Fair Isaac would use a Web site to explain your credit score to you.  Apparently, it ain’t easy to explain a credit score.  Here’s a sample of one of the algorithms that are included in the patent (this one is an algorithm for telling the customer their score, and then explaining areas of possible improvement):


So it takes a rocket scientist to explain credit scores?  Should it really be this difficult?

Even worse, should Fair Isaac be able to control the credit score algorithm as well as the way to explain credit scores?  Seems to us that things are a little out of hand.

Credit Scores, FICO Scores 2009-05-19T21:19:02+00:00
FICO Credit Score A credit score is a number that reflects your creditworthiness at a given point in time, and can change as information on the credit report changes. Many people have heard about credit scoring but do not understand the basic facts about what it is and how it works.  FICO credit scores are the most widely used credit scores in the United States.  Here’s what you need to know about them.

A credit score is a number that reflects your creditworthiness at a given point in time, and can change as information on the credit report changes. Many people have heard about credit scoring but do not understand the basic facts about what it is and how it works.

The Fair Isaac Corporation (FICO) first developed models (or algorithms) for calculating credit scores in the 1950s. Credit scores started gaining widespread use in the late 1980s and gained even more attention in the 1990s when mortgage lenders began considering credit scores in their loan making decisions. Today credit scoring is used as a predictor of risk and decision making for loans, approving credit cards, opening bank accounts, mortgages, utility accounts, auto financing, insurance rates, and even employment background checks. Credit Scores are found on a Credit Report which supplies the information that the credit score is derived from. There are over 50 items of information on a credit report that are used in developing the credit score, and the information comes from many sources.

There are many different types of credit scoring models used today but the most used and accepted by the lending community is the FICO score. While each of the 3 major credit bureaus use the FICO model they each use a slightly different representation. There’s Equifax’s “Beacon Score”, Trans Union’s “Classic Score”, and the Experian’s “FICO Risk Model”. The scoring range is 300 – 850. Fair Isaac divides the scoring range into five risk categories:

                                    780 – 850 – Low Risk

                                    740 – 780 – Medium-Low Risk

                                    690 – 740 – Medium Risk

                                    620 – 690 – Medium High Risk

                                    620 – Below – High Risk

The consumer should also understand that there are many credit bureaus and reseller’s out there selling credit scores. Some of these providers do not sell scores using one of the FICO models. These scores are termed FAKO scores because they use a scale different from FICO and may be deceiving. For example if your bank is using the FICO model to determine if you will be approved for a loan and you buy a credit scores whose model uses a scale that goes from 501 to 990 it will be very difficult to compare the two scores. It is recommended that when you purchase your credit score make sure the seller is providing a FICO score to avoid confusion.

It is also important to know that there are different scoring models at credit bureaus designed for particular industries that use them. For example the credit bureaus will sell the auto industry a score calculated specifically for them, while selling a slightly different version designed for the insurance industry. This is done because risk factors for these industries are not exactly the same. Even credit scores that are sold directly to consumers may vary slightly from the score that is sold to specific industries. All this can make credit scoring complex to understand to the average person.

Consumers must also appreciate that while we do have the right to free credit reports (at least one per year from each credit bureau) the same is not true or credit scores. The score’s must be made available to the consumer but the bureaus do have the right to sell the scores at reasonable rates. If a consumer chooses to buy their score directly from the credit bureau it will not negatively affect the consumer’s credit score (soft inquiry). When a bank or auto dealer buys your score with your permission to make a lending decision this inquiry will be inserted on your credit report and affect your score (hard inquiry).

Credit Scores, FICO Scores 2009-04-20T12:21:50+00:00
Establishing Positive Credit (Part II of II) Yesterday, we presented part I of a two part series called “Establishing Positive Credit”.  We continue the series today, with a number of additional tips that can help you establish credit and improve your credit score.

Another method that may be used is to utilize the good credit of a close friend or relative. If there is a high trust factor between the two parties, apply for a small loan or credit card with the help of them as a co-signer. You may also ask them to add you on to one of their credit card accounts with a positive history as an “authorized user”.

There are some risks with this plan. If you do not pay the account as agreed you can damage the credit of your co-signer. If you become an “authorized user” on someone else’s credit card and they make a late payment it will also show up on your credit history. Both parties involved must be diligent in their communication about proper payments to ensure that both credit profiles will not be affected in a negative way.

You may also apply for a credit account at a retail store or gas card (Jewelry stores, Appliance stores Furniture stores, Tire stores, Gas companies, Department stores). These outlets typically have lower credit standards than traditional Banks, Credit Unions, or Major Credit Cards.

These also have some drawbacks as well. You may have to buy something that is not in your budget, and they tend to carry higher interest rates. Remember, you must use the account for it to help your credit rating. You may also damage your credit if you open too many of these types of accounts. Only use these types of accounts to build up your credit rating. The goal is to be able to get approved by Banks, Credit Unions, and major Credit Cards issuers for your credit needs (Visa, MasterCard, Discover, and American Express).

Another option you should look into is which stands for “payment recording builds credit”. PRBC is America’s Alternative Credit Bureau, providing a helpful service to the over 50 million people with limited or no credit history. If you pay your monthly bills on time, PRBC can help you build credit through what is called alternative credit.

Most of us get frustrated when we pay bills like; rent, cell phone, insurance, cable, electric & utilities, and daycare on time and they don’t report the on time payments to the three credit bureaus. But make one payment late and it will be reported. With PRBC, your on-time payments count. You build credit for paying your bills on time, even if you have no credit history. It can also be used if you have accepted and are paying back a loan to a friend or relative. PRBC, is supported by the National Association of Mortgage Brokers, and The Federal Reserve Board of Governors. Its reports are accepted by the country’s biggest mortgage lenders Fannie Mae and Freddie Mac. Please visit this web site for more information on building your credit.

Remember that building your credit is not done overnight, but if you follow these strategies you will be headed in the right direction. In summary; open a checking and savings account at your Bank or Credit Union. Open new credit accounts and use them properly, pay them early or on time. Use the help of family members or friends if the situation is right. Create a good credit mix by having at least one good installment account, and one good revolving (credit card) account. Stay within 30% of your credit limit on revolving accounts, and keep your overall debt low. Use the website to assist your efforts through alternative credit. Make sure you check your credit report for errors that may be lowering your credit scores.

Credit Scores, Improve Credit Score 2009-02-11T23:41:19+00:00
Establishing Positive Credit (Part I of II) Every one wants to have a good credit score; however this is easier said than done. For anyone to have good credit they will need to establish good credit accounts and maintain them in the way you and your creditors have agreed. Remember, a borrower with no credit is treated like one with poor credit! Credit scores work like the scales of justice, you need to have more positive accounts on your credit than negative accounts if you are going to be considered for credit on major purchases.

Some folks, especially young people have a problem called a “thin credit file”, this means that you have either not established any credit at all, or not enough to get a credit rating. In this case most creditors will not extend credit because they see you as high risk.

Many people who have fallen on hard times can fall into the trap of becoming a cash payer only. While this may keep you from having late payments, charge offs, or collections on your credit report in the future, it won’t help improve your credit standing either.

If you have plans in your future to make major purchases on credit like a new home or automobile you are going to need to establish some positive credit accounts. Even if you have had a major problem in the past like a bankruptcy you can still regain a positive credit score if you follow the right strategy after the bankruptcy. Whether you’re young with no credit, or have had some credit problems in the past, if your financial situation is now stable you should be able to start developing habits to build a strong credit rating.

One of the first steps on the path to developing good credit habits is to open a Savings and Checking account. While doing this does not affect the credit scoring model, it may have a positive effect on your overall credit score through what is called a scorecard. Also, creditors will be more comfortable loaning money to you because they know you have a way to save money and make payments.

If your credit scores are very low you might even have trouble even opening a bank account. If this is the case try a local Credit Union which typically is easier to deal with if you are credit challenged. This is true whether you need to open a new account or a loan. Once you find a Bank or Credit Union you like stick with them, the longer your personal business relationship is the easier it will be to obtain credit in the future.

When starting to build a positive credit history it is best to think small. By opening small credit accounts or loans, and handling them properly your creditors will gain confidence in you and will eventually give you larger accounts. Each account you handle in the correct way is a step in building a strong credit rating.

After you have a Savings and Checking account set up make an appointment with an Account Representative at your new Bank or Credit Union. Be honest with them about your past credit history. Tell them that your problems are in the past and you are working to build your credit profile. Tell them you would like to get either a credit card or small loan to help start building a poitive credit history.

They will pull a credit report and tell you what they can or can’t do for you. If your credit scores fall within their parameters they may give you an unsecured credit card or an unsecured signature loan with a very small limit to get you started. If they do you are on your way to a brighter credit future. Use these loans for items you can afford, or items you would have bought anyway with cash. Make sure you make all your payments early or on time, this will build your credit rating.  If not you may go right back to a bleak credit future.

If your credit scores are so low they will not give you any unsecured credit you still have some options. Ask the Account Representative if they have any secured credit programs you may be eligible for.

A great place to start is a secured credit card account. A secured account is one where you secure the credit with some type of collateral (real estate, automobile, or cash). An example would be; your bank might ask that you put $200.00 into an escrow account at the bank to secure the credit card. Then they will issue you a credit card with a limit of $200.00, there are typically some fees attached to these cards like a set up fee and/or an annual fee. Make sure you ask the Account Representative about these terms, and make sure that they will report this account to all three of the credit bureaus. Once you get your account set up you will have a positive revolving (credit card) account reporting on your credit report.

Once you have your new Secured Credit Card how you use it is equally important as getting it. You do need to use it, but you do not want to max it out or buy needless items that will hurt your financial budget. I recommend that each month you buy something with the card you would have purchased any way; like a tank of gas or a bag of groceries. Do not go over 30% of the cards limit ($200.00 limit x 30% = $60.00). Make sure you pay the bill when it arrives. Each month repeat this and your credit rating will improve. After doing this for 12 to 18 months most banks and credit unions will return your escrow deposit and will now trust you with an unsecured credit card account. They may also raise your credit card limit. Both of these events will also help to build your credit rating. Remember to keep using the card, do not go over 30% of the limit, and always pay your bill early or on time!

If your bank or credit union will not give you a small unsecured loan, ask the Account Representative if a secured loan is available. A secured loan is very similar to the secured credit card. They will give you a loan based on some type of collateral (real estate, automobile, or cash). If you were to default on this loan they would have the legal right to use the collateral as repayment for the loan.

Let’s say you needed to by a couple of tires for your vehicle and you have saved up the money to purchase these tires. Great, but if you go pay cash for the tires you will not help your credit rating. However, if you put the cash in the bank to secure a loan for the tires, then pay for the tires with the banks money you are establishing a positive account. Now pay back the bank over time with several installments and the bank will close out the account and return your collateral or deposit. Now you have a recent positive installment account reporting on your credit bureau.

Check back tomorrow to read part II of this mini-series on establishing good credit.

Credit Scores, Improve Credit Score 2009-02-10T23:39:37+00:00
The Right Way to Do a Credit Inquiry So you need to buy something on credit. What do you do? If you are like most people you walk in to someone’s business and tell them you need to buy something. You will both negotiate a price for the needed item; once this is settled you fill out a credit application so they can go run a credit inquiry to see if you will be approved. Sound familiar? This is the wrong way to do a credit inquiry, especially if you are credit challenged.

If the salesperson comes back and says that you are not approved you have wasted your time and theirs. But worse than that you have just lowered your credit score even further by initiating a hard credit inquiry. Doing inquiries this way will impact your credit score in a negative way. The more you do the worse your credit score gets.

How can you do a credit inquiry without doing damage to your credit score?

We recommend that you do a credit inquiry on yourself before you go shopping. A great web-site to do this is (*Beware of fake credit scores!) Here you can buy your credit report with a score and this inquiry is considered soft, as it will not influence your score. Consumers do have the right to access their credit reports and scores without it affecting their credit score; however you must use the correct source. Once you know your credit scores you can go shopping and you can tell the sales representative what your credit score is before you make any transactions. An educated sales representative should be able to tell you if your scores are in the range that they can do business with. If the scores are in the correct range they will still have to run a credit inquiry on their system which will be a hard inquiry, but at least now you know that your chances for being approved are very high! If they tell you your scores are not in the range that they can work with you simply move on and do not initiate a hard inquiry on their system that will lower your score further.

Another reason to do your inquiries this way is it gives you more negotiating power (of course this only works if your credit scores are good). Example: When a car salesperson wants to do a credit inquiry early in the sales process, they want to see if they can do business with you before they waste their time on test drives and so forth. If you know your scores are good tell them my credit scores are very high, however you would like to negotiate the best sales price before we discuss any financing or trade in options. Do not give them your Social Security number until you know the sales price, trade in value (if applicable), and what financing options they are offering. When you do this you let them know you are not a pushover and have just taken control of the negotiations. If you let them run your credit early in the process you give them the control of the situation and you lose!
This is just another reason why knowing what’s going on with your credit files is vital to your overall financial and credit health!

*The most commonly used credit score in the financial industry is a FICO Score which ranges from 300 – 850. We do not recommend buying a credit score that uses a different scale. The scores sold at are true FICO scores.

Credit Scores, Improve Credit Score 2009-01-17T19:45:23+00:00
How A Good Credit Score Saves You Money Lenders make money off of the interest payments that they receive from customers that take out loans with them. So, what happens if customers do not make their monthly payments? Lenders lose money, plain and simple. But they have a way of recovering the money that they’ve lost. They simply charge higher interest rates to people who are more likely to default on their loan.

Lenders make money off of the interest payments that they receive from customers that take out loans with them. So, what happens if customers do not make their monthly payments? Lenders lose money, plain and simple. But they have a way of recovering the money that they’ve lost. They simply charge higher interest rates to people who are more likely to default on their loan.

Here’s an example: Let’s suppose that a banker lends out $1,000 to eight different people (and they all have terrible credit scores). The banker hits all eight customers with high interest charges because he knows statistically that one of the eight will default on the loan. The remaining seven, who continue making high interest payments, will essentially cover the cost of the defaulted loan. The banker still makes money in the long run (‘cuz that’s what bankers do).

You may be wondering what all of this has to do with you. Well, I’m getting around to it; just give me a minute to share with you the statistics of defaulted loans in relation to credit scores. The following table will show you how banks (and other companies who extend you credit) calculate risk based on credit scores. The left column indicates credit scores and the right column indicates the odds that a person with that credit score will honor the loan.

Credit Score RangeOdds of Customer Repaying
Above 8001292 to 1
760 to 799597 to 1
720 to 759323 to 1
700 to 719 123 to 1
680 to 69955 to 1
660 to 67938 to 1
620 to 65926 to 1
500 to 6008 to 1
Below 500 Too Risky – No Loan

Okay, let’s bring it home.  What does this have to do with you?  If your credit score is less than perfect, you will have to pay higher interest rates on all types of credit including mortgages, car loans, credit cards, personal loans, consumer loans and more. All of these higher interest payments can add up to a lot of money.

Don’t believe it?

Think about this: A $200,000 home at 6% will cost you $231,676.38 in interest payments over the course of a 30-year loan. Keep in mind that I’m only talking about interest here. This price does not include the $200,000 principle balance (so you end up paying $431,676.38 for a $200,000 home). A 6% interest rate is very good. In fact, it’s one of the lowest rates you can get. But what happens if you can’t get a 6% loan? What if you have to finance at 8% because of a poor credit rating? You will end up paying $328,310.49 in interest over the term of the loan. That’s a difference of $96,634.11. Can you afford to waste almost $100,000? (Unless you are Bill Gates, I assume the answer is an emphatic “no!”).  Most of us could put an extra $100,000 to pretty good use rather than giving it to some fat-cat banker.  (Like how about buying a couple of new cars, or paying for your kids’ college education, or retiring early?)

Bad credit scores can have a devastating affect on your credit card payments as well.  It’s simple. Folks with bad credit scores are charged high interest rates.  High interest rates cause your monthly payment to go up.  High monthly payments mean you will be paying the credit card companies tons of money. 

The fat-cat bankers get fatter….

But these are just a few of the obvious ways that a low credit score costs you money. In other articles we will take a look at some things that you may not have thought about.


Credit Scores, Credit Score Ranges 2008-08-19T09:53:48+00:00
Introduction to Credit Score Ranges Ever wonder what type of scores are “good” credit scores, and what type of scores are “bad” credit scores?  This brief article generally describes credit score ranges.

As you probably know, your credit reputation has a credit score associated with it.  Credit scores generally range from 350 (which is a very low credit score) to 850 (which is an excellent credit score).  The scores and ranges depend on which scoring model generated the score (there’s a difference between a “FICO score” and an Experian score, for example).

Since FICO scores are the standard, and are the numbers that are generally used by lenders to evaluate your credit, we’ll use FICO scores in our credit score range example. 

Score RangesHow Lenders Will View These Scores
720-850:These are good to excellent credit scores.  Lenders see you as a moderate to low risk, and are more likely to give you a competitive interest rate on loans they provide. The higher your score, the better the rates you will enjoy, so credit repair can pay off (particularly if your score is below 810).
620-719:These are fair to good credit scores.  In this credit score range, you will be considered a fair to good risk, but interest rates on loans will be higher.  You should work to improve your score by paying your bills on time, reducing your debt, and removing any negative items from your credit report.
350-619:Sorry, these are bad to poor credit scores (don’t feel bad—Millions of Americans have bad to poor credit scores).  In this credit score range, you will have difficulty obtaining credit cards, lines of credits, or loans you need for a new car, a home, etc.  Improving your credit score should be an urgent priority.
Credit Scores, Credit Score Ranges 2008-08-13T09:47:47+00:00
Introduction to Credit Scores The first thing that comes to mind when most people think about their credit is their “credit score”.  Just what is a credit score?  This article gives you the information you need to understand exactly what a credit score is, and how it is calculated.

The first thing that comes to mind when most people think about their credit is their “credit score”.  Just what is a credit score?  A credit score is a number that is calculated as an attempt to “grade” or rank your creditworthiness. The score is used by banks, lenders, utility companies, phone companies, and other businesses that are trying to decide whether you will be a good credit risk for them.  Put simply, companies use the number to decide if you will pay, and whether you will pay them on time.

Put yourself in a bank’s position.  How can they possibly evaluate thousands of loan applications from tens of thousands of people they don’t know, and figure out who is going to pay them back, and who isn’t?  It seems like an impossible task.  One approach would be to personally interview every loan applicant, and talk to each applicant’s friends and relatives to find out about the applicant’s credit reputation. 

That might work ... in the 1800’s. 

Now, it’s simply impossible to do this for every loan or credit application.  The solution has been to use credit scores as a grade or indicator of a person’s credit reputation.  The lender simply pulls a credit report for each applicant and uses the credit score to decide if a customer is a good or a bad credit risk.

So what makes up your credit score?  What goes into this magic number that allows lenders to decide if you are credit worthy?
Credit Score Components The most widely used credit score is the “FICO score” created by Fair Isaac Corporation.  Lenders use FICO scores to help them make billions of credit decisions each year.  FICO scores are based solely on information in consumer credit reports. 

Your credit score is made up of a number of different components.  All of them are related to actions you make (or don’t make).  Two of the largest factors that go into your score are (1) the amount of debt you currently have, and (2) your payment history.  The amount of debt you have is relevant as it may show that you either have room to take on more debt, or you are “maxed out” and probably couldn’t safely add more debt and pay another lender.  Your payment history is relevant because it tends to show whether you have a history of paying your creditors on time (or, whether you have a history of late payments).

To learn more about how your credit score is calculated, how it is used, and how you can improve it, read more articles in this series.

Credit Scores, FICO Scores 2008-08-12T09:58:31+00:00