Credit Scoring 
For years, the entire credit scoring process was shrouded in
mystery. Fair Isaac and other scoring firms said that if they
revealed the scoring system -- and the exact criteria to determine
that score -- their services wouldn’t be needed anymore.
In June 2000, Fair, Isaac surrendered to increasing pressure
from Congress and consumer groups and released a list of the criteria
it uses to determine credit scores. In addition, the company plans
to develop a web feature so you can check your own score.
The five main criteria are:
Your payment history payment history on credit cards, retail accounts
at stores, installment loans, and mortgages. 35% of total score
Amounts owed. What is important is how many accounts have balances
and how much of the total credit line is being used on credit
cards and other "revolving credit" accounts. 30% of
total score.
Length of credit history. That’s why parents should help children
establish credit histories before they go out on their own. 15%
of total score.
New credit. Applying for too much new credit is one of the easiest
ways for people to inadvertently harm their credit score. (10%
of total score)
Types of credit. This takes into account your mix of installment
loans, mortgages, retail accounts, credit cards and finance company
accounts. (10% of total score)
The scores that companies like Fair, Isaac compile are sent to
the credit reporting agencies as composite numbers. In addition
to your salary and other factors mentioned above, here are some
of the things that scoring agencies consider:
Your education level. It sounds arbitrary, but it’s true. A college-educated
person is given more “points” than a high school graduate, for
example.
The number of years you’ve lived in a single location. If you’ve
moved around a lot, you lose precious points. If you’ve moved
because of a better-paying job, you can recoup some of those points
if your salary has increased, for example.
The number of years you’ve worked for a single employer. Scoring
agencies like people who are stable. That’s why they assign more
points to people who’ve lived in a particular place for several
years or who’ve worked for a single employer for many years.
Are you a homeowner? If you are, you get additional points. Renters
are considered more transient and less reliable to repay their
loans.
If all of this sounds arbitrary or unfair, remember that scoring
systems have allowed department stores and other lending agencies
to offer those “on-the-spot” credit approvals. You know the routine.
You fill out some basic information on a card and five minutes
later (if the computer is working properly), you’re either approved
or disapproved for a loan.
You’re about to know more
Some things would seem obvious in credit scoring. A high income
earns more points than a low income. But minorities get lower
scores, too.
Fair, Isaac is only part of the process. Once the company processes
a score, it is then transmitted to the lender, which makes the
ultimate decision on whether a credit application is approved
or denied. Lenders insist that the scoring system does not unfairly
hurt minorities, but simply reflects overall lending histories.
But, of course, we will try to improve our credit scores, won't
we? There are certain things we do know. Fewer credit cards are
better than several cards. Paying on time is a must.
Some of the things that weigh heavily are stability -- both
at home and on the job -- and a good payment history. The scoring
system looks at how close you are to the limits on your cards,
what you spend money on and how much you ask for in cash advances.
Pay attention. But don't despair.
