Expert offers the 411 on FICO scores: ASSESSMENT OF CREDIT WORTHINESS KEY FOR ALL CONSUMERS

Aug 29, 2008 (San Jose Mercury News - McClatchy-Tribune News Service via COMTEX) -- SRFB | Quote | Chart | News | PowerRating -- Aug. 29--Anyone who has applied for a mortgage or a credit card in the past couple of decades almost certainly has had his or her "FICO score" scrutinized by the lenders who decided whether to approve the loan or issue the credit card. FICO scores gauge how likely consumers are to pay off their debts, and they take their name from Fair Isaac Corp., which began developing credit-scoring formulas more than 50 years ago. Founded in San Francisco but now based in Minneapolis, Fair Isaac provides custom credit-scoring systems for each of the three nationwide credit-reporting bureaus, Equifax, Experian and Transunion.

As head of Fair Isaac's consumer education and advocacy initiatives, San Rafael-based Barry Paperno is an expert at breaking down the mysteries of the FICO score for befuddled borrowers. Paperno recently spoke with Mercury News reporter Sue McAllister about that. Here is an edited version of their conversation.

Q Let's do the basics first: What is a FICO score?

A. It is an assessment of your credit worthiness, in the form of a three-digit number from 300 to 850. The higher the score, the lower the risk to the lender, and the better for the consumer. The score is a predictor of future risk to a lender, and it is based entirely on credit information found in a credit report.

Q. Which parts of a credit report matter to the FICO score?

A. There are four parts of the credit report the score looks at. The first is credit account

information (such as home loans, car loans and credit cards). The second is collection items, for example a doctor's bill that's been unpaid and they hire an agency to collect. The third is public record items. That can include judgments, for example if a creditor has taken you to court; and federal and state tax liens and bankruptcies.

The fourth area is inquiries. That's anytime anyone, usually a lender, looks at your credit when they are making a decision about whether to extend you credit.

Q. Are "inquiries" bad?

A. Inquiries can negatively affect your score, but it's going to have minimal impact if any.

Q. How many years back does a credit score look?

A. It's looking at everything on your credit report, no matter how old. But most negative information falls off after seven years.

Q. What's a common misconception about credit scores?

A. One is that having too much credit available to you puts you at a higher risk potential than someone who has less credit available to them. There's not a lot of positive correlation between having a lot of credit available to you and going out and using it irresponsibly. We just don't see that, so there is nothing to be gained by closing off available credit.

Q. So I shouldn't cancel my old, unused Macy's card?

A. In some cases that could actually hurt your score.

Q. What factors affect people's FICO scores?

A. The five areas that affect their score are payment history, which makes up about 35 percent of your score; outstanding debt (about 30 p ercent of score), length of credit history, new accounts, and the different types of credit you have.

Q. What's most important with payment history?

A. How recent was the most recent late payment -- that rates very highly. No. 2 is frequency, how many lates on how many accounts. Third is severity: How late were you?

Let's say you have five accounts on your credit report with late payments on them. You have written all the creditors and said "I'm current now, would you from the goodness of your heart remove those late payments?" Let's say four out of five remove them. But if the one remaining has the most recent late payments on it, you may not have helped your score by even one point.

Q. With credit card debt, for example, what's the optimal ratio of credit card balance to available credit limit?

A. If you're below 10 percent, whether total or in each of your accounts, that's the place to be. It's actually better to show small balances than zero balances, but I want to emphasize slightly. That does not mean you should carry a balance every month and pay finance charges.

Q. And if you can't make that less-than-10-percent mark?

A. Shoot for 50 percent.

Q. When I shop at Target, for example, they always ask if I want to apply for their credit card, and get a discount that day. Is applying a good idea or bad?

A. You can help yourself in one area and hurt yourself in another. The benefit will be you're adding more available credit to your picture. But in the "length of credit history" you're going to be averaging in an account with one month of history. That could bring down your average.

Q. Is it really important for consumers to know their FICO scores?

A. By knowing your score, and what it considers and doesn't consider, you can make better financial decisions that can save you money or make the difference between qualifying or not qualifying for a mortgage. Your score can also affect the rates you pay on your current debt.

Contact Sue McAllister at smcallister@mercurynews.com or (408) 920-5833.

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