The ABCs of Getting Out of Debt by Garrett Sutton

Author:Garrett Sutton [Sutton, Garrett]
Language: eng
Format: epub
ISBN: 9781937832414
Publisher: RDA Press, LLC

Chapter Fourteen

Credit Scores

While your credit report is important, the numbers that are created from your credit report – your credit scores – may be even more important. Credit scores are mysterious and often misunderstood. But they’re so important that it’s worth taking the time to understand them.

How Much Is a Good Credit Score Worth?

Most people by now have heard of “FICO” scores. They’re the scores created by the company formerly known as the Fair Isaac Company, and now just by the acronym FICO. FICO scores have been around for many years and they’re the most widely used general type of scores. But you don’t have a single FICO score because different FICO-based scores can be created depending on who is using them, and for what purpose.

There’s one goal in creating a score, and that’s to predict behavior. In most cases, lenders or insurance companies are using scores to predict the risk in lending money (or extending insurance) to a consumer. But they can also use scores to predict how profitable a current or prospective customer might be, to predict what will happen if you increase a customer’s credit line or change the terms of an account etc.

Scores are created by analyzing the factors that different groups of consumers have in common. The goal is to find which factors those who pay their bills on time have in common, as well as the factors those who don’t pay on time, share. Often FICO scores are based on information in the credit report, but they can also include information in an application or in customers’ account histories.

On the plus side, there is simply no way credit would be as easily available as it is today if credit reports and scores didn’t exist. If you need to borrow for emergencies – or for good debt – credit scoring makes it possible to get a loan very quickly. Credit scoring is objective, and for the most part, unbiased in the sense that they don’t look at race, gender, neighborhood demographics, or other similar factors. As Gerri Detweiler has noted, there are some legitimate concerns that it is skewed against recent immigrants or minorities who may not have established a traditional credit file. Here are some basics to know about credit scoring:

• It all depends. Most of us think of credit scores as a “scorecard” – in other words, like a golf game where you tally up your strokes and see what your score is. But it’s not so simple. In fact, there is tremendous data-crunching that goes into creating these systems. The most important thing to understand is that every factor is interdependent on the other data that’s available. It’s like a golf game where each stroke was based not only on the fact that you swing at the ball but also on wind factors, lighting and gallery noise.

We tend to think of credit scores in direct terms ... if I do X then my score will improve (or go up by) x number of points.

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