Credit Scores
MONEY MANAGEMENT II
What We’re Covering Today
 What is a credit score/rating?
 What is a FICO score?
 Why do I have more than one credit
score/rating?
 Why is my credit score important?
 How can I improve my score?
What is a Credit Score/Rating?
 A credit score/rating is a measure of a person’s
ability and willingness to make credit payments on
time.
 Because your credit history is constantly evolving,
your credit score/rating can and will change over
time.
 It is a snapshot of the contents of your credit report
at the time it is calculated.
 Your credit score/rating will be determined by the
lender themselves or one of the major reporting
credit bureaus.
What is a FICO Score?
 In 1956, a mathematician and an engineer founded a
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company (The Fair, Isaac Company or FICO) on the
principle that data, used intelligently, can improve
business decisions.
In 1958 FICO built its first credit scoring system for
American Investments.
In 1981 FICO introduced their first credit bureau risk
score.
FICO Scores range between 300-850. The higher the
number the less risk associated with the applicant.
Today FICO scores are the driving force behind credit
scores/ratings.
How Is My FICO Score Calculated?
 They’re not telling us!
 Considering the rating system they have developed is
what keeps them in business, the Fair, Isaac
Company has long refused to disclose the specifics of
the algorithm used to calculate their scores.
 Although many factors are included in the
calculation of your FICO score, they can be grouped
into five major categories, each weighted differently
depending upon their importance.
Breakdown of FICO Score Calculations
Different FICO Categories and What They Mean
 Payment History: Have you paid on time?
 Amount of Current Debt: What do you owe in total?
How many different accounts do you owe to?
 Length of Credit History: How long have you been
using credit?
 Types of Credit In Use: What kinds of credit do you
currently use? What have you had experience with?
 Pursuit of New Credit: Are you opening many
accounts? Why are there so many inquiries?
Why Do I Have More Than One Score?
 As we’ve talked about over the last several weeks, lenders
set the terms and conditions of credit. This includes
whether or not you are approved for credit.
 All three major credit bureaus use the FICO score in
calculating their credit scores/rating. However, each
bureau receives different information and has different
models for determining their score/rating.
 If there is a discrepancy larger than 5-20 points between
your scores, this may be an indicator of possible errors.
 Many lenders will use their own models to determine
how risky you are, weighing the importance of factors
differently based upon their lending practices.
Why is My Credit Score Important?
 Not only will your credit score be one of the most important
factors in determining whether or not you are approved for
credit, it will also be a major factor in determining the terms
and conditions of the loan/credit extension.
 Lower Score= Higher Interest = More money!
 Subprime Loans = Loans offered to less than desirable
candidates. They will come with higher rates and more fees.
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620 is the magic number!
 How scores affect loan amounts example
 Insurance rates are affected by credit scores too!
 Research has shown the lower your credit score, the more
likely you are to file a claim.
How Can I Improve My Score?
 Make payments on time!
 Reduce overall debt
 Review your credit report for errors
 Limit your applications/inquiries
 Listen to the lender/bureau
Wrap-Up & Review
 A credit score/rating is a measure of a person’s
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ability and willingness to make credit payments on
time.
Your score can change quickly!
The Fair, Isaac Company generates a score ranging
between 300-850 that lenders use in determining
whether or not you receive credit.
Credit scores have an impact on how much you will
pay for the use of credit. In general, they can
determine a lot about your lifestyle.
There are simple ways to help improve your score!