Deconstructing the FICO® Score

According to the Fair Isaac Corporation®, in the 1950’s, Bill Fair and Earl Isaac founded the company, which introduced a new concept of credit scoring to credit grantors. In 1981, FICO® introduced the first credit bureau risk score. Today, the predictive analytics company works with businesses in more than 80 countries to determine creditworthiness.

FICO Score Analysis factors payment history, amount of debt, length of credit history, new credit and types of credit used to determine an individual’s risk score. According to myFICO®, not all scoring factors have equal importance in determining an individual’s credit worthiness. Thirty-five percent of an individual’s credit score is determined by payment history, making it the most significant contributing factor. Amounts owed account for 30 percent of a credit score, while length of credit carries less weight in determination with only 15 percent. New credit and types of credit used each account for 10 percent of the score.

Long credit history, no serious delinquencies and recent credit card use help boost a FICO score, while high credit usage, recent collection and bad payment history have negative impact. Factors also include how many times lenders have requested information about your credit. Scores range from 300 to 850 and the higher the score, the better. Risk scores between 720 and 850 are considered excellent.

Certain information is not included or factored in a FICO score, however. According to the Fair Isaac Corporation; race, color, religion, national origin and marital status are prohibited by U.S. laws from consideration. Other factors omitted include age, salary, occupation, title, employment history, where you live, interest rates being charged, and child/family support obligations.

Consumer-initiated inquiries, such as ApplyConnect resident screening for landlords and real estate agents, are not included. Pre-approved credit offers and administrative inquiries are also not factored in the FICO scoring model. As the Fair Isaac Corporation provides predictive analytics to determine a consumer’s creditworthiness, information that is determined not to indicate future credit performance is also not included. If an individual is participating in credit counseling, it is not reported.

Determining an individual’s creditworthiness is an important part of the tenant screening and rental application processes. It is important for property managers to select qualified applicants for their properties to mitigate undesirable rental risks. Understanding what factors contribute to an individual’s credit score, as well as criteria omitted provide property managers with valuable insight.

By: Laura Mowry

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