To answer this question, let’s start off by revealing what the acronym stands for. FICO stands for Fair Isaac Corporation. Fair Isaac was founded in 1956 by engineer Bill Fair and mathematician Earl Isaac. They developed the FICO scores, a measure of credit risk, that are the most used credit scores in the world. In fact, according to MyFICO.com, 90% of the largest U.S. banks use FICO scores.

FICO scores are available through all of the major credit bureaus in the United States including Equifax, Experian, and TransUnion. You can also get your scores directly at MyFICO.com. It’s important to note that the credit bureaus and many other credit monitoring companies also offer you their version of your credit score based on information from your credit reports, but these scores are NOT the same as your FICO scores and usually not the same scores your lenders will use. These scores are what are commonly known as FAKO scores and are more often than not, way off from your actual FICO score.

FICO scores can range from 300 to 850, but the majority of scores usually fall within the 600s and 700s. MyFICO.com reports that they are the only site offering all 3 of your FICO scores and the median FICO score in the U.S. is 723.

The exact scoring formula of FICO is kept very secretive, but they do tell us this:

Credit scores are calculated based on your rating in five general categories:

35% - Payment history
30% - Amounts owed
15% - Length of credit history
10% - New credit
10% - Types of credit used

Higher scores mean lower interest rates. If you’ve been declined for a loan, chances are lender has made their decision based on your credit scores. You can increase your FICO scores by removing bad credit and adding good credit to your credit. Learn how you can remove late payments, collections, charge-offs, bankruptcies, foreclosures, repossessions, judgments, and tax liens on your credit report to improve your chances at getting a loan.

Labels: credit repair, Fair Isaac, FICO, FICO scores, increase FICO

Did you know that settling some old debts can actually harm your credit score? Consumers shouldn’t always assume that paying off old debts will improve their financial situation or make them a better risk in lenders' eyes. Borrowers who try to pay off old delinquencies, charge-offs and collection accounts often find that sometimes, doing the right thing does the wrong thing to your credit.

How can this be possible? The Fair Isaac Corporation, the company that determines your FICO scores, has fairly determined that the most recent accounts on your credit count towards your scores the most. The older the account is on your credit report the less it factors in to your scores and a lot of times when you pay off a debt you make the account current. The only problem is that the credit bureaus still report the account as negative, but now instead of being old, it’s brand new like it just happened. It will stay on your credit report for 7 more years. This can damage your credit scores drastically.

Before you consider paying off an old debt on your credit report, you may want to contact the creditor in writing. Tell them of your good intentions and ask them if they will agree to delete the account from your credit reports if you settle your debt (lots of times for much less than you owe). Get their agreement in writing!

You must be careful when contacting creditors though. Arranging a payment plan or even inquiring about an old debt can restart the statute of limitations in some states, allowing creditors to sue you. Simply contacting a creditor about a past-due account can renew its interest in trying to collect, leading to harassment and hardball tactics.

Some debt collectors will actually refuse to delete the account from your credit reports, even if you pay. Others will pretend they are “not allowed” to. That is obviously not true.

Even worse, some unethical collection agencies may promise to upgrade how your debt appears on your credit report in exchange for payment, then not follow through or make matters worse by making the debt seem more recent than it is.

So, what should you do if they won’t agree to delete it? Simple – don’t pay it. Wait until the end of 7 years for it to come off of your report. It’s really not hurting your scores that much anyway and the older it gets, the less it factors in.

Instead of paying them off, work to get new positive accounts reporting on your credit report. As the old negative accounts become less relevant, the new positive accounts become more relevant and increase your credit scores.

Remember to always monitor your credit reports to make sure that unethical collection agencies don’t purposely re-age your accounts. It’s illegal, but it still happens quite often. Check your state’s collection laws to see how long a collector can collect on your debt. Once the debt is past the statute of limitations, they can no longer legally collect on that debt.

Labels: credit scores, credit scoring, debt collectors, debt settlement, Fair Isaac, FICO, settle debts

My last blog post was about how to take full advantage of becoming an authorized user. About 60 million consumers are authorized users on someone else's credit card. But, that is all about to change. My previous blog post is pretty much obsolete now thanks to FICO's new scoring model. Read about that and other changes below.

New FICO Rules May Affect Millions
By Vicki Lee Parker

Monday, June 18, 2007

In September, the FICO credit-scoring system is set to undergo a major overhaul. Fair Isaac Corp., the Minneapolis company that creates the formula used to calculate the score, is downplaying the change, saying it won't have much of an effect.

I beg to differ. Any change in the way that scores are decided affects millions.

Forty of the top 50 financial institutions in the country rely on FICO scores to determine whether to approve a loan and what rate to charge. Retailers, landlords, insurance companies, employers and utilities also use it to decide how to do business with you, or if they should.

Because Fair Isaac doesn't want rivals to copy its formula, it isn't giving out many details about the changes, but spokesman Chris Watts did say this:

Fair Isaac divides the population into 10 segments based on credit history and applies a different formula to each. Eight segments include people with good credit and two are for people with serious problems.

Under the new system, the population will be divided into 12 segments: eight for people with good credit and four for people with bad credit. That could result in a slight change up or down in many scores.

"This new system will give lenders more dependable scores for those higher-risk consumers and those who have little history," Watts said.

Now, that's not really a bad thing if your credit is pretty good, but if you're on the margin or trying to establish your credit, it could mean trouble. Because businesses interpret scores differently, a slight change could be the deciding factor in whether a landlord decides to rent to you or whether your bank decides to increase the interest rate on your mortgage or home-equity loan.

For example, according to Fair Isaac's Web site (MyFICO.com), the difference between a score of 620 to 659 and one in the range of 660 to 699 can result in a $163 difference in the monthly payment on a 30-year mortgage.

Watts conceded that certain groups will feel the effect far more than others. People with thin credit histories or poor credit will likely see their score jump or drop significantly, he said.

As it goes with most changes, there are some people who are going to be hurt through no fault of their own.

One adjustment to the current credit scoring system will be to stop giving credit points to people who are authorized users on someone else's credit card.

That change will affect about 30 percent of people with credit reports, or about 60 million consumers, said John Ulzheimer, president of educational services for Credit.com and a former manager for Equifax and Fair Isaac.

That change is going to affect young adults trying to establish credit by attaching themselves to their parents' credit cards; spouses — mostly women — who are authorized users on the family credit card; and people who are trying to re-establish credit by coat-tailing a family member's good credit history.

Fair Isaac has closed this loophole because the lending industry has complained about abuses and said the loophole was distorting borrowers' true credit risk.

So what can consumers do?

First, those who became authorized users to help build up credit should consider switching to a joint account. That will allow the joint member to continue to reap the benefits of the primary cardholder's strong credit history.

However, that option poses more risks to the primary holder of the credit card. For example, if an authorized user abuses the card, the primary cardholder simply has to make a phone call to revoke the user's card. But it's not as easy to remove a joint user. The primary cardholder would have to close the account and open a new one to remove the user from the account.

Labels: authorized users, credit cards, credit scoring, Fair Isaac, FICO