Steadfast FinancesFICO Score CEO Debunks Myths About How Credit Scores are Calculated

FICO Score CEO Debunks Myths About How Credit Scores are Calculated

Filed in Banking , Personal Finance 2 comments

The problem I most often run into when talking basic personal finance metrics like FICO scores, credit reports, and overall creditworthiness is that many people fail to realize that your FICO score is based on pure statistical evidence with no consideration for judgment and does not allow for human emotion. So a recent “Come to Jesus” moment on repaying your debts on time for the last year may sound like a good sales pitch to give your car salesman or mortgage broker, but will likely fall on deaf ears if your FICO score is in the lower two quartiles of the U.S. population.

One point I didn’t know:

Is it true that every time you apply for a loan it hurts your score?

“It depends on the kind of product you’re shopping for,” says Greene. With car loans, for example, Fair, Isaac understands that people shop for rates. “If you apply for five different car loans within a couple of days, we understand that you’re looking to buy one car at the best rate. And there’s no adverse impact on your credit score.”

On the other hand, when people apply for five different credit cards in the space of a week, they’re usually seeking to open multiple accounts simultaneously. “In those situations we will take a few points off someone’s FICO score because we’re worried they’re sending a signal that they need too much credit.”

Good to know the FICO scoring algorithm can detect certain things automatically based on recent activity, and not penalize us for it.

Source & Credit
Dan Gross, Aaron Task, & Fair Isaac CEO Mark Greene
FICO Questions Answered: Fair, Isaac CEO Reveals 3 Key Ways to Improve Your Score

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Posted by CJ   @   12 January 2011 2 comments
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2 Comments

Comments
Jan 12, 2011
2:35 pm
#1 Sun :

“a couple of days” and “the space of a week” are totally different. Maybe he should answer what happens when one opens multiple credit card account in a couple of days. Are they still treat them as one inquiry? Anyway, a few points isn’t that a big deal.

Jan 12, 2011
2:45 pm
#2 Matt SF :

I had a similar response, but no way is he going to give up the Golden Goose (e.g. the methodology that keeps us guessing).

I’d wager multiple credit card inquiries are counted as individual inquiries. The question, at least from the creditor’s viewpoint, is why the sudden demand for credit? Since credit cards are viewed somewhat negatively (as any P2P lending investor will tell ya), it’s not surprising he said several credit over a few days time period affect FICO scores negatively.

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