As you know, credit is all the rage right now and the
most talked about financial topic. Who knew that a
three digit credit scoring model based on high level
mathematics, called algorithms, would become all the
rage almost twenty years after it's creation? What I am
talking about, of course, is the dreaded F.I.CO. scoring
system. You know, the F.I.CO God that watches your
every move & determines what you can and cannot do.
The system was designed and invented by Bill Fair and
Earl Isaac, hence the name Fair Isaac and Company
score, in 1956 in San Rafael California, where the
company's headquarters still stand. In 1956, however,
Al Gore had not invented the internet yet so the
scoring model was a very dormant and "before it's time"
science. Enter the computer and internet revolution
and bingo; automation takes over the lending world!
The scoring model was viewed by the banking world as
a cost cutting, and therefore, profit enhancing savior,
since bank profits were declining due to competition
and increased costs. The banks saw this F.I.CO scoring
system as one way to get rid of their most costly
expenditure, human underwriters. They integrated the
scoring system into their automated systems and viola,
a system that allows them to underwrite millions of
people at a fraction of the cost, and at a much faster
pace. This is called economies of scale. Much like what
Henry Ford did with the assembly line in auto
manufacturing. Today, this scoring system dictates
your every financial move and seems to follow you
wherever you go, whether it's to rent an apartment,
get auto insurance or purchase anything on credit.
Bottom line, it's everywhere and will dictate what you
can and cannot do and how much it will cost you. If
you think you can get away from it and buy everything
cash, good luck because for some things like renting a
car, you must have a credit card and bingo, you will
need to have credit to get credit. Having no credit is
almost as bad as having bad credit. Furthermore, most
people have no clue what their scores are, how the
system works, who to go to in order to correct errors;
which, by the way, over 70% of credit reports have
errors and 29% of these errors will cause you, the
consumer, to get declined when applying for credit. It
is a disaster! It's similar to giving a 14 year old kid the
keys to a car and expecting him/her not to crash it.
You cannot manage what you are not taught. The
science is very secretive and not taught. You sort of
have to run into the information, and even then, you
don't know how
accurate the information is. The system is used by
banks as a "tell all" of what you have done and who
you are as a person (ie.Your character). In the event
of any errors showing on your credit report, you are
guilty until you prove yourself innocent and that is why
identity theft is such a huge problem and epidemic in
the U.S., robbing many people of their dignity and hard-
earned money.
Now that I have scared you senseless and painted a
doom and gloom picture, the good news is that you can
educate yourself and learn to tame this wild beast.
Here is some ammo for you. Your scores can range from
300 to 950 points. Although in my many years of
research, I have never seen either end of the
spectrum. Once you achieve a 720+ credit score for
each of the three credit reporting agencies, which are
Equifax, Experian and Trans Union, you are considered
platinum! This doesn't mean you cannot get a loan or
credit of any type if you have scores below 720, it just
means that it will generally cost you more money the
lower your scores are. Additionally, here is the
breakdown of what makes up your credit scores: 35%=
Your payment history, 30%= Amount of debt showing
on your credit report, 15%= Your length of credit
history, 10%= Type of credit. There is installment
credit (ie. Auto and mortgage loans) and revolving
credit (ie. Charge and credit cards), 10%= New credit.
This category involves new accounts and inquiries.
(Hint, when you apply for credit and authorize that
institution to pull your credit report, this is called a
credit inquiry and this type of inquiry that you authorize
when applying, will cause your credit scores to go down
an average of 5-22 points!). Makes no sense that we
get penalized for just applying, but it's the way it is
because the system doesn't want you to take on debt
but you must in order to get a score, so it's really a
catch 22!
So there you have it. Follow these guidelines and you
will be just fine: 1. Have 2-4 bank credit cards. 2. Pay
your bills on time. 3. Do not charge more than 30% of
your credit limit. 4. Use your open credit cards at least
once every six months. 5. Do not close out credit cards
that you have had for over two years. 6. Check your
credit at least once a year (this "self check" inquiry will
NOT lower your scores). 7. Live below your means and
forget about competing with the Jones'. It's a losing
battle anyway you look at it!
Where does your credit score fall into? Top
