Ten Facts About the History of FICO

A three digit number that tells the story of your past and holds the potential of your future? Nope, it’s not your weight or your cholesterol. And hopefully it’s not the score of your latest golf round, yikes! Of course, it’s a credit score—one of the very first things you want to know about a potential borrower. So you always know your customers’ credit scores, but do you know anything about where they came from?

 

While the exact method behind calculating these revealing little numbers remains a mystery, here are a few fun facts you may not have known about the history of one of the most powerful numbers in our lives.

Ten Facts You Didn’t Know About FICO:

1. FICO actually stands for the Fair Isaac Corporation, a company started in 1956 by an engineer and a mathematician.
2. It wasn’t until 1958 that FICO created its first credit scoring system for American Investments.
3. Later that year, FICO sent out 50 letters to America’s biggest lenders asking to explain their credit scoring system. They got one response.
4. One of the best investments founders Bill Fair and Earl Isaac ever made? The $400 each of them contributed to start the Fair Isaac Corporation.
5. Remember Montgomery Wards? In the early 1960’s FICO built their first credit scoring system.
6. In 1995, nearly 40 years after FICO began; Fannie Mae and Freddie Mac recommended the use of FICO scores to evaluate mortgage loans.
7. In 2010 FICO introduced their national FICO certification for mortgage lenders with AllRegs.
8. FICO also boasts that it has more than half of the world’s top 100 banks as their clients.
9. Even more impressive, nine of the top ten Fortune 500 companies are FICO clients.

And finally…

10. Just how prevalent are FICO scores in the mortgage industry? Today, FICO scores are used in 3 out of 4 US mortgage originations.

Missed Mortgage Payments Hurt Credit Scores

Missed mortgage payments, short sales, and foreclosures can all drastically bring down a credit score.

Lenders use credit scores to measure how well a person handles debt. Credit scores range from 300 to 850, with 650 and below considered poor credit. A mortgage makes up a big part of a person’s credit score and often is the most important part of a person’s credit profile.

And just missing a single mortgage payment by 30 days can ruin a credit score, say FICO and VantageScore, which have studied the impact mortgages can have on credit scores. For borrowers, that can be nearly as destructive as a foreclosure to a credit score, according to the companies.

On the other hand, loan modifications, which is when lenders approve new loan terms, have a “very, very minimal” impact to credit scores, possibly dropping the borrower’s score by 10 or 15 points, Sarah Davies, the senior vice president for analytics at VantageScore, told The New York Times.

A good credit score is important not just for financing home purchases, but employers increasingly check credit as well as landlords when seeking rentals. Also, poor credit scores can also mean higher costs on car loans and credit cards. Check out this site for the ways of putting aside some money for a long-term goal.

How a Credit Score Is Affected

FICO evaluated three various scenarios of mortgage holders — a borrower with a great credit score (780), a borrower with good credit (720), and a poor credit borrower (680) — in a study it conducted last month. Here’s the impact FICO found:

▪ 30 days late on a mortgage payment: The 780 credit score borrower has her credit score fall to 670-690. The 720 credit score borrower has his fall to 630-650. The 680 credit score borrower falls to 600-620.
▪ Short sale, deed in lieu of foreclosure, or settlement, assuming the balance has been wiped out: The 780 credit score borrower falls to 655-675; the 720 credit score falls to 605-625; and the 680 credit score drops to 610-630.
▪ Foreclosure, or short sale with a deficiency balance owed: The 780 credit score drops to 620-640; the 720 credit score falls to 570-590; and the 680 credit score decreases to 575-595.

Source: “Fallout From a Poor Credit Score,” The New York Times (April 24, 2011)

Credit Cards To Rebuild A Low Credit Score

How Secured Cards Can Help The Financial Lives Of Consumers In The Future

Credit cards that are available and can be used to help consumers rebuild their low credit score come in either unsecured or secured lines of credit, but for consumers who are having trouble in their financial life and, as a result, may be in a bad position, secured credit cards are an option that these individuals turn to for the help they need to repair any damage that may have been done due to either poor financial practices or unavoidable financial distress.

However, there are still some consumers who are unsure of how they can use a secured credit card to help their financial life and gain benefits from doing so in the future. Obviously, bad credit repair is a process that consumers must take seriously, devote a great deal of time to and, for those who have most benefited from secured credit card use, gaining smart financial practices that can be used throughout a consumer’s lifetime will, again, pay dividends in the future.

Secured credit cards can be helpful in the life of a consumer down the road as future financial needs and aspects of a consumer’s personal financial life, like the availability of alternative forms of credit or interest rates will all depend on their credit score. Typically, consumers that have been successful at using secured credit cards have researched these options from reputable financial institutions, offered collateral through the form of a deposit in a savings account, and use this credit card to make affordable purchases each month and promptly repay them, which is only one piece of the bad credit repair puzzle but can be greatly helpful in setting consumers on the right path to a better credit score.

According to MyFICO.com, It’s important to note that repairing bad credit is a bit like losing weight: It takes time and there is no quick way to fix a credit score. In fact, out of all of the ways to improve a credit score, quick-fix efforts are the most likely to backfire.” Also, consumers are prompted to check their credit report, make sure they pay their bills on time, which includes debts outside of their secured credit card purchases as well, and simply work to erase any debts that may be owed, as a consumer cannot truly and efficiently begin the bad credit repair process while they owe to various creditors.

Yet, one reason that consumers are prompted to use secured credit cards and other bad credit repair methods is because it can be beneficial later in life when a consumer attempts to either purchase a home, get a car loan, or when other areas of a individual’s financial life require a credit check, a better score will obviously lead to lower interest rates in many cases and, as a result, more affordable costs. While, again, secured credit cards are beneficial as they can be a line of credit accessible to consumers with a bad credit score, they are only one aspect of the bad credit repair process and, even these types of credit which, when a reputable financial institution is the lender report to the big credit bureaus, can cause damage if not properly used.

However, consumers attempting to begin the bad credit repair process and who may be in need of a line of credit to do so can benefit from proper secured credit card use and, as a result, can set themselves on a more prosperous financial path that will lead to benefits seen in other areas of the consumer’s personal finances, if proper habits are developed during the repair process.