FICO - How Does It Work
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The document is a training presentation about FICO scores, which are credit scores developed by Fair Isaac & Co. that assess the creditworthiness of borrowers based on their credit histories. It outlines the components of FICO scores, such as payment history, amounts owed, and length of credit history, as well as explains their significance for lenders in determining risk and loan terms. Additionally, it highlights the importance of understanding FICO scores for helping customers manage their financial health while fostering better decision-making and customer service.
FICO - How Does It Work
- 1. 1 Credit FICO What’s your FICO? Training Presentation 2006
- 2. 2 Objectives To learn and understand the concept of FICO To know how FICO is important to your CM To know how it helps you as a debt collector To use this information to help the CM & Amex
- 3. 3 What is a FICO Score? • A FICO score is a credit score developed by Fair Isaac & Co.. Credit scoring is a method of determining the likelihood that credit users will pay their bills • Fair, Isaac began its pioneering work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation • A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed • The Federal Trade Commission has ruled this to be acceptable
- 4. 4 How does FICO work? • When you apply for credit – whether for a credit card, a car loan, or a mortgage – lenders want to know what is the level of risk to them in providing credit to you. • FICO scores are the credit scores most lenders use to determine your credit risk. • You have three FICO scores, one for each of the three credit bureaus – Experian, TransUnion, and Equifax. As this information changes, your credit scores tend to change as well. • Your 3 FICO scores affect both how much and what loan terms (interest rate, etc.) lenders will offer you at any given time. • Taking steps to improve your FICO scores can help you qualify for better rates from lenders.
- 5. 5 What’s in your FICO Score?
- 6. 6 What’s in your FICO Score? Payment History • Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.) • Presence of adverse public records (Bankruptcy, judgments, suits, liens, wage attachments, etc.) • Severity of delinquency (How long past due?) • Amount past due on delinquent accounts or collection items • Number of past due items on file • Number of accounts paid as agreed
- 7. 7 What’s in your FICO Score? Amounts Owed • Amount owing on accounts • Amount owing on specific types of accounts • Lack of a specific type of balance, in some cases • Number of accounts with balances • Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts) • Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)
- 8. 8 What’s in your FICO Score? Length of Credit History • Time since accounts opened • Time since accounts opened, by specific type of account • Time since account activity
- 9. 9 What’s in your FICO Score? New Credit • Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account • Number of recent credit inquiries • Time since recent account opening(s), by type of account • Time since credit inquiry(s) • Re-establishment of positive credit history following past payment problems
- 10. 10 What’s in your FICO Score? Types of Credit Used Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)
- 11. 11 About FICO Score Credit bureau scores are often called “FICO scores” because most credit bureau scores used in the U.S. are produced from software developed by Fair Isaac and Company. FICO scores are provided to lenders by the major credit reporting agencies. FICO scores have different names at each of the credit reporting agencies. All of these scores, however, are developed using the same methods by Fair Isaac, and have been rigorously tested to ensure they provide the most accurate picture of credit risk possible using credit report data Credit Reporting Agency Equifax BEACON® Experian Experian/Fair Isaac Risk Model TransUnion EMPIRICA®
- 12. 12 How does it help us? You and your customers do not want them to lose their financial independence and flexibility credit provides. Knowing about FICO scores & how important it is for your customers helps us to: • Take decisions on the account. E.g. Reinstatement, PAR, One Time charge. • Negotiating on uncollected debts by educating your customers with possible consequences. • Providing the right kind of options / money sources. • Know your customers expectations based on their FICO scores. • Giving complete and accurate information to your customers. • Last but not least no matter what the FICO scores of any customer are, the way we treat them should not change.