Credit facts & fiction

Fallacy: My score determines whether or not I get credit.

Fact: Lenders use a number of facts to make credit decisions, including your FICO® score. Lenders look at information such as the amount of debt you can reasonably handle given your income, your employment history, and your credit history. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low, or decline your request for credit although your score is high.

Fallacy: A poor score will haunt me forever.

Fact: Just the opposite is true. A score is a “snapshot” of your risk at a particular point in time. It changes as new information is added to your bank and credit bureau files. Scores change gradually as you change the way you handle credit. For example, past credit problems impact your score less as time passes. Lenders request a current score when you submit a credit application, so they have the most recent information available. Therefore by taking the time to improve your score, you can qualify for more favorable interest rates. See how improved scores can lead to savings.

Fallacy: Credit scoring is unfair to minorities.
Fact: Scoring considers only credit-related information. Factors like gender, race, nationality and marital status are not included. In fact, the Equal Credit Opportunity Act (ECOA) prohibits lenders from considering this type of information when issuing credit. Independent research has been done to make sure that credit scoring is not unfair to minorities or people with little credit history. Scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given score, non-minority and minority applicants are equally likely to pay as agreed.

Fallacy: Credit scoring infringes on my privacy.

Fact: Credit scoring evaluates the same information lenders already look at - the credit bureau report, credit application and/or your bank file. A score is simply a numeric summary of that information. Lenders using scoring sometimes ask for less information - fewer questions on the application form, for example.

Fallacy: My score will drop if I apply for new credit.
Fact: If it does, it probably won't drop much. If you apply for several credit cards within a short period of time, multiple requests for your credit report information (called “inquiries”) will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.

Average Credit Statistics

As a company that helps the nation's largest banks and financial institutions assess credit risk, Fair Isaac is often asked to describe the credit use of a typical consumer. In researching the answer, we discovered that consumers vary immensely in what types of credit they use and how they use it.
By analyzing a representative national sample of millions of consumer credit profiles, Fair Isaac was able to survey the panorama of credit activity across the U.S. The following statistics reflect the average use of credit by today's consumers.

Number of Credit Obligations
On average, today's consumer has a total of 13 credit obligations on record at a credit bureau. These include credit cards (such as department store charge cards, gas cards, or bank cards) and installment loans (auto loans, mortgage loans, student loans, etc.). Not included are savings and checking accounts (typically not reported to a credit bureau). Of these 13 credit obligations, 9 are likely to be credit cards and 4 are likely to be installment loans.

Past Payment Performance
On average, today's consumers are paying their bills on time. Less than half of all consumers have ever been reported as 30 or more days late on a payment. Only 3 out of 10 have ever been 60 or more days overdue on any credit obligation. 77% of all consumers have never had a loan or account that was 90+ days overdue, and less than 20% have ever had a loan or account closed by the lender due to default.

Credit Utilization
About 40% of credit card holders carry a balance of less than $1,000. About 15% are far less conservative in their use of credit cards and have total card balances in excess of $10,000. When we look at the total of all credit obligations combined (except mortgage loans), 48% of consumers carry less than $5,000 of debt. This includes all credit cards, lines of credit, and loans-everything but mortgages. Nearly 37% carry more than $10,000 of non-mortgage-related debt as reported to the credit bureaus.

Total Available Credit
The typical consumer has access to approximately $19,000 on all credit cards combined. More than half of all people with credit cards are using less than 30% of their total credit card limit. Just over 1 in 7 are using 80% or more of their credit card limit.

Length of Credit History
The average consumer's oldest obligation is 14 years old, indicating that he or she has been managing credit for some time. In fact, we found that 1 out of 4 consumers had credit histories of 20 years or longer. Only 1 in 20 consumers had credit histories shorter than 2 years.

Credit Inquiries
When someone applies for a loan or a new credit card account - in short, any time one applies for credit and a lender requests a copy of the credit report - this request is noted as an “inquiry” in the applicant's credit file. The average consumer has had only one inquiry on his or her accounts within the past year. Fewer than 6% had four or more inquiries resulting from a search for new credit card account - in short, any time one applies for credit and a lender requests a copy of the credit report - this request is noted as an “inquiry” in the applicant's credit file. The average consumer has had only one inquiry on his or her accounts within the past year. Fewer than 6% had four or more inquiries resulting from a search for new credit.

 

Credit Score Vs. FICO Score

Overview
The Consumer Federation of America defines a credit score as "a number that helps lenders and others predict how likely you are to make your credit payments on time." Credit scores are kept by credit bureaus and the lenders that purchase credit histories from the credit bureaus. The Fair Isaac Corp. (FICO) score is the most common credit score. It is used by the three major national credit bureaus and many other financial institutions, but more non-FICO credit scores have been used in recent years.

Numbers
FICO scores range between 300 and 850. FICO executives won't disclose how they determine the scores, but the Federal Reserve Board reported that the median score is about 720. Almost 60 percent of consumers with credit bureau records have scores higher than 700, and about 15 percent have scores below 600. Consumers with higher scores are more likely to receive credit and low-interest loans.

Brand Names
The three major credit bureaus all use FICO's formula, but they utilize different brand names, reports the Federal Deposit Insurance Corporation (FDIC). Equifax calls its score "Beacon." Experian uses the term "Experian/Fair Isaac Risk Model." TransUnion used the term "Empirica" for many years, but now calls its scores "FICO Risk or Classic."

The three credit bureaus often report different FICO scores to lenders despite using the same formula because they often have different information about consumers in their files.

Other FICO Scores
FICO has developed new scoring formulas in recent years. They include NextGen FICO Risk, FICO Expansion and FICO Industry Options. NextGen has scores between 150 and 950, which better differentiates consumers' predicted payment performances, the FDIC reports. Expansion includes information that was often not in FICO scores, including rent and utility payments, payday loans and checking accounts. Industry Options includes scoring models for credit card issuers, mortgage lenders and other industries. FICO's original formula, which was created in the late 1950s, is now called Classic FICO.

Non-FICO Scores
The three credit bureaus devised their own scoring system in 2006 called VantageScore. The scores range from 501 to 990 and are "scaled similar to the letter grades of an academic scale (A, B, C, D and F)," reports the FDIC. Consumers often have higher VantageScore scores than FICO scores.

The credit bureaus sell VantageScore reports, the original FICO score reports, and the new FICO score reports to lenders. The FDIC reports that the acceptance level of the new scores "remains to be seen."

Other Scores
The Federal Reserve Board reports that Fannie Mae and Freddie Mac recommend two scores for mortgage lenders--the original FICO score and the MDS Bankruptcy Score that is produced by Management Decisions Systems, Inc. MDS scores range between 0 and 1,300.

According to the FDIC, banks often have their own models that they use in conjunction with FICO scores. They include Application Scoring, Attrition Scoring, Bankruptcy Scoring, Behavior Scoring, Collection Scoring, Fraud Detection Scoring, Payment Projection Scoring, Recovery Scoring, Response Scoring and Revenue Scoring.

These scoring models often include information that is not in credit bureau reports. The Application system, for example, includes length of employment, whether consumers own or rent their residences and income information.

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