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Color of Money Live With Michelle Singletary
Credit Scoring with Craig Watts of Fair, Isaac and Company, Inc.
Thursday, June 22, 2000 at 2 p.m.

Michelle Singletary
Michelle Singletary

Typically, lenders considering almost any kind of credit decision will look at a variety of types of information, including one or more credit scores. While there are many kinds of credit scores, the most frequently used are the FICO scores developed by Fair, Isaac. For the first time, Fair, Isaac is revealing specific information on what factors are used to determine a credit score.

My guest this week is Craig Watts, consumer affair manager for Fair, Isaac and Company, Inc. Founded in 1956, Fair, Isaac's founders introduced the FICO score and credit scoring in the 1960s to help lenders improve business performance, customer service, and consumer access to credit. The FICO credit-scoring system is used by lenders to make billions of credit decisions each year, including more than 75 percent of mortgage loans.

Despite the system's significance, few people know about it, and those that do, little understand it. Join me today as we discuss the nuts and bolts of credit scoring and how to ensure there will be no surprises next time you apply for a loan or credit card.

Michelle Singletary: Good afternoon and welcome to my regular online discussions about money matters. Today, as you know we are discussing credit scores. It's one of the most important issues consumers should know about and yet few people understand how they work. Here's your chance to get some information on how important credit scores are to getting better deals on your loans or credit cards. So ask away.

Michelle Singletary: Good afternoon and thanks to those of you who are returning from Tuesday and those just joining today. The computer folks tell me we are all fixed up and ready to go. Craig's back and ready to answer your questions about credit scores. Thanks for hanging in there and I hope you will find this online discussions helpful.

washington, dc: exactly what is a low credit score?

Craig Watts: A credit bureau score is a number that tells a lender how likely a person is to repay a loan, or make credit payments on time. Such scores are based entirely on the information then in the person's credit report. I'll refer to FICO scores since they're produced using risk scoring models that Fair, Isaac has developed. A low FICO score tells a lender that the consumer's credit risk is high compared with other consumers. That consumer is more likely to not pay on time or even default on the loan, in other words. FICO scores range from the 300s to the 900s, with most people receiving scores in the 600s and 700s. What a lender considers to be "low" in that overall range is up to the lender.

Washington DC: I was recently a victim of credit fraud. I am working with the utilities companies to resolved the issue. I am in process of purchasing an automobile however, I want the best interest rate possible. I don't have any blemished on my credit profile except for these two collection items, that are not mine. Once everything is cleared, how long does it take for the credit bureaus to recalculate my score?

Craig Watts: Credit scores are incredibly fast, so the answer is very nearly "no time at all." Each score is a snapshot of the person's credit risk picture at that point in time, based on the information currently in the person's credit report. That's why mortgage lenders often will get more than one FICO score on a borrower during the course of processing a mortgage application. The lender wants to know if the score has changed as a result of new information being added or old information deleted (or errors corrected) from the credit report.

Sacramento, California: Will Fair Isaac give me my actual credit score? Can you tell me what my score means and what score I need to qualify for a low interest rate?

Craig Watts: We're excited about our plans to provide consumers later this summer with their FICO score, an explanation of the score and suggested ways to improve it. We expect to launch the first part of that service, score explanations over the Internet, next month. Today some mortgage lenders will share your score and the reasons behind it in the context of a mortgage discussion. As to qualifying for a specific interest rate, different lenders have different criteria including the credit score required. You're best bet is to ask individual lenders what they offer and what they require.

North Bethesda, MD: Why is it necessary to have three credit reporting agencies? There's a greater risk of recording information incorrectly with three agencies. Why not have one national credit reporting agency? All companies who use credit reports would be a member, instead of the way it is now, where companies pick the agency they want to join, and they don't have to join all three of the major credit reporting agencies.
Also, does the FICO score differ from the Beacon score? Thank you.

Craig Watts: First, the BEACON score is a FICO score, produced at Equifax from the models developed by Fair, Isaac. At Experian the FICO score is called the Experian/Fair, Isaac Risk Model. And at Trans Union, it's called EMPIRICA. The three credit reporting agencies are private companies, not government agencies, and compete vigorously with one another. Both lenders and consumers benefit from having more than one choice.

Mitchellville, MD: It's my understanding that too many credit inquiries can affect one's FICO score and overall credit rating. As a homeowner with excellent credit, I get besieged with offers of pre-approved credit cards and home-equity loans, which obviously required credit inquiries that I didn't initiate. What can be done to stop this? Consumers should not be held accountable for inquiries they did not initiate.


Craig Watts: The FICO scoring models only consider credit inquiries brought about when you apply for credit yourself. The models ignore all other types of inquiries, including promotional and account management inquiries even though these will show up on the copy of your credit report that you see. Although the lender may be getting your score to decide whether to send you the offer, the solicitations you receive for pre-approved credit cards etc. don't affect your FICO score. But if you accept the offer, the creditor will look at your credit report and produce an inquiry that could affect your FICO score.

Michelle Singletary: Could you explain why and how the three major credit reporting agencies can come up with three different FICO credit scores on consumers?

Craig Watts: The data reported to each of the three big national credit reporting agencies can be slightly different. Because the score is based solely on the data in that agency's credit file, the scores will often differ slightly from agency to agency. This is why it's a good idea for every consumer to check their credit report regularly at each of the three big agencies.

Silver Spring, MD: Thank you for taking our questions...

As a college student, I fell into the trap of "charge, charge, charge..." I had at one point 5 store credit cards, 2 gasoline cards, 2 Visa cards and one MasterCard and Discover. My combined limit was well over $8000. At one point they were maxed out, and then payed off when I received a "loan" from my parents to get them cleaned up. As a compromise for that gesture, I had to close most of the accounts (all but the Visas and MC).

I took a look at my credit rating, and saw all of these older credit cards still on there, with notations that I had closed the accounts. Will these closed accounts hurt my credit rating?

Craig Watts: No, they won't hurt your FICO score. Lenders want to see your credit history, not just how much credit you're managing today. That's why your credit report will continue showing credit cards and loans that have been paid off or closed.

Arlington, VA: I submitted this question Tuesday, but I guess you lost it...
My fiance and I are considering a personal loan to supplement our savings towards our wedding. We both have good credit histories. We can comfortably make the payments we anticipate (approximately equal to our current savings contributions, only for a few months beyond the wedding) but we are concerned with her student loans and each of us having an auto loan, that we we may get turned down or have to pay a higher rate because of our debt/income ratio. How much of an applicant's income will an institution typically lend on an unsecured basis?

Craig Watts: Good question and best wishes for the wedding, but the FICO score doesn't consider your income. Lenders often do as part of their overall application review. So your best bet is to ask your question to a lender or two.

Michelle Singletary: I know the "explanation service" Fair Isaac is planning to offer isn't up and running yet but what can consumers expect in general. Will they be able to get specific information on what's wrong with their score? How detailed do you expect to get in explaining how they might improve their credit score?

Craig Watts: We want to give consumers as much useful, specific information as we can based on their FICO score and the information in their credit report. We will be providing information in our score explanation service on what factors caused a person's score to be lower, and things they can do over time to improve it. Lenders for years have received specific information from the credit reporting agencies on why an individual FICO score isn't higher. Many will share that information with applicants today if asked.

CA: Somebody close to me seems to have the idea that the more credit cards he opens the better for his credit history. More disturbing to me is that he thinks it's a good idea to not make regular payments and pay interest on occasion so as to show creditors that he is capable of making regular payments. Is this thinking correct?

For someone who has never made a late payment or paid a single dime in interest to any credit card, I'm troubled by this.


Craig Watts: Sounds like there are two parts to your question. First and as you surmised, paying on time every time is very important to maintaining a good credit profile. That doesn't mean you have to pay off the entire credit card balance every time, however. Whether you pay interest or not isn't considered by the FICO score, but the credit card company might consider you a better customer if you occasionally pay them interest. Second, it's a good idea to keep your balances low on credit cards. Maintaining high balances or balances close to your credit limit can make you appear overextended to other lenders.

Tysons VA: Hi Michelle, hi Craig, my fiance and I had been approved for a new home loan, with my 3 scores being in the mid 700's and his being in the mid 600's. Since higher scores mean better interest rates, does my scores carry more weight in their decision or do they look at the combined average? In this case, are these scores enough to get us the best rate available out there?

Craig Watts: That's the kind of question only a lender will be able to answer with confidence. Different lenders have different ways to handle multiple scores for one loan decision. Same goes for whether your scores are high enough to qualify you for the best available rate. Most consumers score in the 600s and 700s so you're in good company. Lenders also look at other information, so having a great score won't guarantee that you get the best rate or even an approved loan. But it sure doesn't hurt.

Sterling VA: hello! We've been approved by Fannie & Freddie for a loan. At this point, we have not locked in yet. I hear credit scores change by the day. Will taking out a small loan from my 401K for the down payment affect my credit scoring/loan qualifications later when we finalize the loan process at closing?

Craig Watts: Information on your 401K is typically not reported to the credit reporting agencies, so it should not affect your FICO score at all.

Vienna, Va: I am looking to buy a home in the next year. I have paid off all of my credit cards and am saving for a down payment. My question is: Should I close the card accounts or carry a zero to low balance on a few? Which is better for the FICO score?

Craig Watts: It sounds like you're doing a good job of managing your credit. Carrying a low balance on your credit card accounts is a better strategy than closing the accounts, as far as your FICO score is concerned.

Michelle Singletary: Just how long does it take for your FICO score to change once certain information is posted. For example, I know a consumer who closed a bunch of open accounts she wasn't using all at once. Can't such a move actually lower your score? If so how long before the effect of such a move turn from a negative to a positive as far as the credit score is concerned.

Craig Watts: Once the information is posted to your credit file at the credit reporting agency, the effect on your FICO score is immediate. As to whether it's a good idea to close down unused credit card accounts, doing so won't improve your FICO score. In some cases it can hurt your score because it removes available credit without reducing your existing debt, bringing you closer to your total credit limit.

Washington, D.C.: What is the point range for the evaluation? The last time I refinanced my mortgage, I remember the mortgage broker revealing a credit evaluation of some sort in the range of 780 or something like that. He stated that this was an impressive "score." Was that a "FICO" assessment?

Craig Watts: It your 780 score was a FICO score, it was indeed impressive -- you were in about the top 20 percent of U.S. consumers. FICO scores range from the 300s to the 900s, with scores at either end being very rare. Most people get scores in the 600s and 700s.

Washington, DC: I am a third year law student who is going to graduate with about $90,000 in debt. I currently don't have a credit rating that is good enough to secure a private educational loan without a co-signer. My debt to income ratio is poor because of two maxed out credit cards. I have some late payments on an account from 1996 when I was still in highschool. I have called to ask one creditor if they would consider removing a late payment b/c of the fact that I am a student and often don't have consistent income, but they said they don't do that. But, my friend told me that she called all of her creditors and somehow convinced them to remove her negative credit history. Do companies remove or don't they? It seems that even if I get my debt to income ratio down I will still be in bad shape b/c of a few late payments with some companies. I am trying to be more informed and responsible. I am getting married in two years and I want to only have my school loans to deal with, which I plan on consolidating. I want to be able to have a good rating so we can buy a house and a car. What can I do to improve my situation?

Craig Watts: First, credit reporting agencies will remove information from your credit file if the lender confirms that the information is wrong. But accurate negative information will stay there for 7 years, though the older it gets the less impact it has on your FICO score. Your situation is complex, so your best bet might be to talk it over with your banker or see a credit counselor.

No. VA.: Ms Singletary has been a strong advocate for not only releasing people's credit scores when they apply for credit, but also for releasing the exact reasons that someone's credit score is low. Won't that allow people to manipulate their credit score in the short term so that they appear to be a better credit risk than they actually are? Won't that invalidate the scores?

As a someone who has worked hard over the last 20 years to keep my credit history in very good shape, what would differentiate me from someone who has manipulated their score? If the final determination is just up to a loan officers opinion, doesn't that allow for subjective factors that I have no control over to be the deciding factor?

Wouldn't it be better for all consumers if people with credit problems were informed of good credit practices that they could work on for the long term rather than giving them the ability to make short term changes to manipulate the score?

Craig Watts: We don't think FICO score manipulation is a problem today. And our coming score explanation service won't enable people to manipulate their scores over the short term. Though it should prove useful to people interested in improving their credit standing over time. Finally, there are many excellent sources of information on good credit practices, which can help people manage credit well and get good FICO scores.

Michelle Singletary: In one of your earlier answers you said closing accounts will reduce your available credit without reducing your existing debt, bringing you closer to your total credit limit. I thought the whole idea was to have less credit to show you won't become over extended. Could you explain why again why it isn't a good idea to close so many accounts. And, if you want to close the accounts how far apart in time should you do it?

Craig Watts: Closing unused credit cards is a good idea over the long haul because it limits the amount of credit you have to only what you need. However, closing such accounts can hurt your score in the short term, depending on how much money you owe and other factors in your credit report. Here's how that works. The FICO score looks not just at individual factors, but also combinations of factors. One combination is your total available credit on credit cards compared to your total debt. The closer those two numbers get, the more overextended you will appear to lenders. When you close unused credit card accounts, you're in effect reducing the amount of credit available to you without also reducing the amount you owe. That can make you appear overextended. As to how long such a change will affect your FICO score, that will vary based on other information on the credit report.

Reston, VA: Craig,

How are you dealing with public pressure surrounding the use of finance company tradelines in the FICO score calculation?

Craig Watts: Finance company accounts are considered as a separate factor by the FICO scoring model simply because our research demonstrates that it is highly predictive of future payment performance. We use it in our models because lenders want FICO scores to be highly predictive, naturally. However, lenders don't all view past finance company accounts in the same way. As is so often the case, it probably will pay to shop around to different lenders if your credit report shows you have or once had a finance company loan.

Washington, DC: My husband and I expect to be in the market for a mortgage in the not-too-distant future. We have clean credit histories, carry no revolving debt and our current mortgage is very low relative to our incomes. Is there anything else we should be concerned about in considering how lenders will evaluate us? We want to get the lowest interest rate possible. Thanks.

Craig Watts: It sounds as though your credit rating will likely be very good, and you're to be commending also for thinking about your credit standing so far ahead of applying for a loan. If you haven't done so recently, you'll want to get a copy of your credit reports from the three national credit reporting agencies and make sure their information is accurate. Since you and your husband may have different files at each agency, you may end up with 6 separate reports. If you see items you think are wrong, contact both your creditor and the credit reporting agency that gave you that report. Once you know the reports are accurate, you might want to check in with a lender to see if he/she spots anything in your credit profile that could be troublesome. Good luck with your loan, though it doesn't sound like you'll need it.

Michelle Singletary: Well that's it for today. I'm so sorry we didn't have time to get to more questions. But I will be revisiting this topic next month after Fair, Isaac launches its new service. Clearly, people have a lot of questions as to how credit scores work. So please keep an eye out for the next online discussion on this topic. And if you are near a TV look for me today (4 p.m. locally) on the Oprah Winfrey show. I'll be talking about the kind of financial documents consumers should have. Hope you will join me again in two weeks for another discussion about money.

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