CONSUMER CREDIT REPORTING METHODS: FAIR ISSAC CORPORATION (FICO) SCORES
For over a decade, the mortgage industry has used consumer credit scores to determine the level of risk a lender will assume when it offers a loan to the borrower. The most widely used figures are known as FICO scores. Named after its creator, the Fair Isaac Corporation, FICO scores are generated by software technology that formulates a consumer’s creditworthiness based on their credit history.
Although, until recently, consumers did not have direct access to their FICO scores, intense pressure from the mortgage industry, consumer groups, lobbyists, and Congress, have made these scores more readily available to consumers. As a result, consumers may now access their three FICO scores and can obtain facts about how these scores affect them via Fair Isaac’s website (www.myfico.com).
Although FICO scores can be convenient measuring tools, consumers and lenders alike would be wise to carefully examine FICO scores before relying upon them, as the individual FICO scores may vary between credit reporting agencies. At present, a consumer’s credit profile is handled by three national credit reporting agencies, namely Experian, Equifax, and TransUnion. Because each agency maintains consumer information separately, a consumer’s profile information maintained by each agency may vary and the borrower could have a completely different FICO scores for each agency. In addition, because the American credit reporting system is voluntary, some information is reported and some is not. For example, some local or regional creditors may only report to one or two of these national credit information repositories, while national lenders tend to report to all three. Due to these factors, discrepancies between FICO scores may, and often do, result. In fact, according to a recent study by the National Credit Reporting Association and the Consumer Federation of America, one in three Americans have variations of 50 points or more from their high-to-low FICO scores.
Although errors in credits report are often due to negative information, omissions of positive information may occur as well. Borrowers should be particularly conscientious about their FICO scores because a borrower’s potential mortgage interest rate depends, at least in part, upon the consumer credit score reflected by the three FICO scores. According to the same study mentioned above, one out of every five borrowers ends up paying a higher interest rate due to a lower FICO score. Thus, consumers should check their FICO scores at least once a year and also investigate their personal credit profile before they apply for a loan consumers. Such personal credit checks help to avoid potential problems.
The FICO score is used in making 25 billion consumer credit decisions each year, including 75 percent of mortgage loan originations, and until now, these scores were only accessible to lenders. Fortunately, Fair Isaac recently developed a program, the FICO Scored Experian Credit Profile, that allows consumers to access their credit scores from all three profile agencies at one time. Although consumers must pay a fee to obtain these scores, they now have the ability to view their scores just as lenders do. Consumers can go online to purchase their FICO scores, the total cost of which is determined by the services that consumers choose to utilize. Each score is individually calculated, packaged, and delivered on-line as a printable report with the underlying credit report. Fair Isaac also provides an analysis of the FICO scores and offers suggestions on ways to improve them.
Consumers should remember that variations between FICO scores could indicate that their credit reports contain significantly dissimilar information. Again, consumers should be mindful about their FICO scores because their potential mortgage interest rate may depend upon their FICO scores. Therefore, consumers are encouraged to access their three FICO scores and can obtain facts about how these scores affect them via Fair Isaac’s website (www.myfico.com). Such pre-emptive behavior one of the best ways for consumers to protect themselves in a world where so much emphasis is placed on consumer credit ratings and FICO scores.