FICO is a Big Fake
Back in November, we explained what the FICO Credit Scores were and how the FICO credit scores are calculated. If you recall, FICO credit scores run from 300, considered the highest risk of default, to 850, the lowest risk. There’s a twist. Now, Bernice Ross at INMAN tells us that FICO is a Big Fake.
Did you know that the same credit bureau could report three wildly different numbers for your credit score on the same day? Ross decided to check into the stream of data for other sources for her credit score. “Here’s what I found, and it illustrates how bizarre the current credit reporting systems are. (All numbers were reported by Equifax):
- American Express reported Equifax score: 680
- CreditKarma: 618
- Fair Issac (lender-pulled FICO score): 668
- Equifax member: 720
That’s more than a 100-point variance from the same credit-reporting bureau!
FICO is a Big Fake
Many know that you can get your credit report online. Ross found that there’s a difference between the credit report online and the full credit report. “The full credit report included all of our opened and closed accounts for housing, auto, and revolving credit and also included a comprehensive payment history, including any late pays.
You can be on time with no missed payments and still score low. Why? “The percentage of available credit and your on-time payment history are the two biggest determinants of your credit score. Revolving credit is indeed the 800-pound gorilla in this equation. Here’s how they will rank you based upon the percentage of revolving credit that you are using:
- Excellent: 0 to 9 percent
- Good: 10 to 29 percent
- Fair: 30 t0 49 percent
- Poor: 50 to 74 percent
- Very poor: 75 percent or more
To put this in context, if you have a $10,000 credit line and you’re using $5,001 of it, you have a “poor” ranking. And if you have a balance of $3,000, your ranking is only “fair.”
If FICO is a Big Fake, how can we manage our credit scores?
Ross has other information for managing your credit score, but this one surprised me. Close or leave an account open? “Given how revolving credit seems to be determined, it might be smart to leave accounts with zero balances open. However, you can be dinged for having access to too much credit, even if you aren’t using it.”
If you are ready to make the leap to owning a home and you have a low FICO credit score, shop around. You may get turned down by some lenders because they haven’t reduced their standards yet. Keep shopping until you find one that has. You are likely to find a better reception than you expected.
The best advice for rebuilding credit is to manage it responsibly over time. If you haven’t done that, then you need to repair your credit history before you see credit score improvement.”
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