Debt - Your FICO Score and Credit Rating

Debt - Your FICO Score and Credit Rating

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Client Letter - What this idea is about	Engagement Letter	Learning Objectives	What it does; Why It Works - Plain English Analysis	What It does; Why It Works - Technical Analysis & Citations	Tax Killers: ABT, Activity Based Taxplanning
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Checklists for Deployment	Checklist for Monitoring	Financial Accounting: Bookkeeping & Financials	Compliance - what is required for protection, defense, etc.	Alerts & Dangers - Risks, Asset Protection, IRS Defense, etc.

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Capitol Connection
Unearth the secrets of your credit score
The company that invented the system that helps decide if you're a customer or a deadbeat will soon let you peek at your score. How do you measure up to the five standards it uses?
By Tom Woodruff

Consumers will soon get a chance to see how they really rank with lenders.

The long-secret credit scores lenders use to make decisions about loans and credit cards will soon be made available via the Web, along with previously undisclosed information about how they're derived and how they can be improved.

Join the discussion on our Your Money message board.

Credit-card companies have increasingly come to rely on what's known as "risk-based credit scoring" to determine your credit worthiness. These scores are supposed to measure how likely you are to repay a debt -- and are a key factor in determining if you can get credit, and at what cost.

A pioneer opens its doors
Fair, Isaac & Co., the San Rafael, Calif., company that pioneered credit scoring 40 years ago and dominates the field today, has announced that soon, consumers will be able to request their scores and get tips on how to improve them.

This is an about-face for a company that, as recently as last month, closed down E-Loan's attempt to distribute the scores to consumers who requested them.

Fair, Isaac has been under severe pressure from consumer groups, Congress, state legislatures and lending institutions like Fannie Mae to disclose the scores and how they are calculated. Though details are yet to be revealed, it apparently has decided that providing the scores and credit guidance directly to consumers via its Web site was critical to the company's future business.

Already, Fair, Isaac has made the major factors, and their weighting, available to the public. While not full disclosure, the information can help you understand why your score may not be as high as you or your lender might want.

The five factors that count
Fair, Isaac's software calculates your score on the basis of data collected in five basic categories: payment history, amounts owed, length of credit history, new credit and types of credit used. While Fair, Isaac has not revealed the exact formula used in its software, it has recently revealed how each of these factors are weighted and how you might improve your score.

Payment history (about 35% of total score): Your payment history on credit cards, retail accounts at stores, installment loans and mortgages is taken into account in calculating your score. Specifically, how late your payments were, how much was owed, how many late payments and how recently they occurred are all taken into account. If you have a number of accounts and most show no late payments, your score will be improved. How old the late payments were can be very important. According to Fair, Isaac, "A 30-day late payment made just a month ago will count more than a 90-day late payment from five years ago."
Amounts owed (about 30 % of total score): While owing a lot of money on many accounts might indicate that you are overextended, your FICO score will not necessarily be harmed by large outstanding amounts. What is more important is how many accounts have balances and how much of the total credit line is being used on credit cards and other "revolving credit" accounts. In an attempt to improve their credit scores, people sometimes make the mistake of closing down credit-card accounts where they have small balances and consolidating their debt under one credit card. This can actually worsen your score since the percentage of your lines of credit that is still owed would actually go up.
Length of credit history (about 15% of total score): If you are just trying to establish a credit record, you have few options to improve your score here, since how long your credit accounts have been established is what counts. Parents should take note that establishing a credit record for your children before they go out on their own could give them a leg up when they apply for credit later.
New credit (about 10% of total score): Even though this category makes up only about 10% of the total score, applying for too much new credit is probably one of the easiest ways for people to inadvertently harm their credit score. Here, the FICO model looks at how many new accounts you have established, how long it has been since you opened a new account and how many recent requests for your credit have been made by credit reporting agencies. Fair, Isaac says that if you request your credit report from one of the agencies this does not count since it is a "consumer-initiated inquiry." Until recently, your score would have gone down if you made a number of applications for credit cards or mortgages within a short period of time --even if all you were doing was shopping around for the lowest rate or best overall deal. Now, Fair, Isaac claims that they lump together inquiries made within a short period of time as one inquiry. So, if you're shopping around, make your inquiries all within a few days if you can.
Types of credit (about 10% of total score): This factor takes into account your mix of installment loans, mortgages, retail accounts, credit cards and finance company accounts. Fair, Isaac, however, is a little vague about how it weights your mix of account types. It does indicate that this factor may be given less weight if the company has full information about you for the other four factors.

When the credit bureaus deliver your FICO score to your lender, the score is also accompanied by what are called "reason codes." These explain what factors lowered your score. For example, one reason code might be "number of accounts with delinquency." For you, the reason codes could be very important, since they will indicate the best ways to improve your score

Client Letter -

What this idea is about

Engagement Letter

Learning Objectives

What it does, Why it works - Plain English Analysis

What It does, Why it works - Technical Analysis & Citations

Tax Killers

Cost Killers

What to gather - preparing for your CPA, your attorney, or preparing to start the job on your own

Assistance - What To Do - Forms - checklists, time-line to do, etc.

Spreadsheets & Computations

Contracts, Trusts, etc.

Reports Required

Checklists for Deployment

Checklist for Monitoring

Financial Accounting: Bookkeeping & Financials

Compliance - what is required for protection, defense, etc.

Alerts & Dangers - Risks, Asset Protection, IRS Defense