3 bureau credit score

Blending the ingredients of a credit bureau score

BANKRUPTCY

Because of the considerable influence of credit scoring in today's lending environment, it's important that everyone associated with your credit union's loan operations understand what credit scoring is all about.

Credit bureau scores are often called FICO scores because most of them are produced from software developed by Fair, Isaac & Co. The three major credit reporting agencies-Equifax, Experian, and TransUnion-provide FICO scores to lenders.

Fair, Isaac last year agreed to make FICO scores available to consumers. Its Web site- www.fairisaac. com-states, "Score Power, launched in 2001 by Fair, Isaac and Equifax, is the only service that enables consumers to buy their FICO score-the score lenders use. It's available for $12.95 through www.myfico. com.

FICO scores range from a high of 850 to a low of 300. The higher the score, the more creditworthy the borrower. A lower score is based on a statistical analysis that means the consumer is more likely to become delinquent on one or more accounts or file bankruptcy.

FICO scores are based on information in five categories, which are weighted as follows:

1. Thirty-five percent of the score is based on payment history. It shows whether or not consumers have paid past credit accounts on time. Included in this category are public record and collection items, such as bankruptcies and judgments.

The www.myfico.com site states, "These are considered quite serious, although older items and items with small amounts will count less than more recent items or those with larger amounts."

2. Thirty percent is based on amounts owed. If consumers are overextended, this is the category that will lower their score. Do consumers have ample capacity for additional credit, or are they maxed out on credit cards? Having additional debt capacity is crucial to a good score.

3. Fifteen percent is based on length of credit history or the length of time consumers' credit accounts have been established.

4. Ten percent is based on new credit-the amount accumulated in the past 12 to 18 months. "Research shows that opening several accounts in a short period of time represents greater risk, especially for people who don't have long-established credit histories," the Web site states. "This also extends to requests for credit, as indicated by certain 'inquiries' to the credit reporting agencies. Inquiries remain on your credit report for two years, although FICO scores only consider inquiries from the past 12 months."

Excessive shopping for credit and opening up numerous trades in a short period of time will also lower FICO scores.

5. Ten percent is based on types or "mix" of credit. "The credit mix usually won't be a key factor in determining consumers' scores, but it will be more important if your credit score doesn't have a lot of other information on which to base the score," according to the Web site.

It's my experience that installment credit tends to raise the score and credit cards tend to lower it. Multiple loans from finance companies will also lower the score.

Most consumers are surprised to learn that the following are not considered in FICO scores or by the credit bureau:

* A consumer's debt-to-income ratio;

* A consumer's income;

* A consumer's length of residence; or

* A consumer's length of employment at a current or past employer.

Consumers can improve their credit scores by:

1. Paying down credit card balances and never making just the minimum payment. Ideally, consumers should always pay their balances in full.

2. Always making payments on time.

3. Being discreet about opening new accounts.

4. Acquiring solid credit histories with ample years of credit experience.

Contact Bill Mapother at 502-587-5451 or at www.mapother.com.