Mark Greene, chief executive of Fair, Isaac & Co., creator and proprietor of the FICO score provided this explanation of credit scores:
"The FICO score is a measure of a consumer's financial health and creditworthiness," Greene says. It's simply a number, ranging from 300 to 850 -- the higher the better. The average FICO score in the U.S. is about 700, and pretty much every bank in the country uses a FICO score when making lending decisions. But while the scores are important, they're not the be all and end all.
"Scores are meant to be one of several things bankers use in doing what we call sound underwriting," Greene says. Lenders should also be taking into account borrowers' background references, their capacity to repay loans, and collateral.
FICO creates the score simply by feeding numbers into its formula: "It's based on pure, statistical evidence, with no judgment or evaluation or emotion." The main factors Fair, Isaac takes into consideration are:
• How much total indebtedness a consumer has
• How long they've had the debt. "Newer relationships are riskier than things you've been paying over a long period of time," Greene says.
• How much available credit is being used: "If you're close to the edge on your credit cards, that's a danger signal."
• The mix of an applicant's credit portfolio -- is it all credit cards (bad) or a mixture of credit cards, a mortgage, and a car loan.
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