Credit Scores & Financial ExclusionA Growing Cheatsheet for Kiva Zip fellows,

by Kiva Zip fellows

A Credit Score• Numerical expression based on a statistical analysis of a person's credit files, to

represent the creditworthiness of that person.

• in other words, the “likelihood that people will pay their bills”

• PRIMARILY based on credit report information typically sourced from credit bureaus.

• Used by lenders (banks, credit card cos) to evaluate potential risk of lending to a specific person

• In most cases, your credit score determines (a) whether you qualify for a loan at all, but also (b) how much you can borrow (loan or credit limit), (c) at what cost (interest rate)

• Credit scores are also used by mobile phone companies, insurance, gov departments, property companies. As such, beyond their original function of representing credit worthiness, credit scores have become a sort of numerical shorthand for “how risky / trustworthy is this person” to do business with

How to read FICO scores

• FICO, previously known as Fair Isaac Corporation, is the most widely known credit score in the US, used by most credit bureaus and financial institutions

• 90 of the top 100 largest U.S. financial institutions use FICO to make consumer credit decisions

• Inputs and parameters are designed to “predict the likelihood that a consumer will go 90 days past due or worse in the subsequent 24 months after the score has been calculated”

• FICO Scores range between 300 - 850

• 623 being the median FICO score of Americans in 2010

• historically, scores >620 are considered “prime”, with those below considered “sub-prime”

• However in recent years, mortgage lenders and insurers have tightened it even more - many large institutions will NOT insure mortages of those with scores <660, or will charge extra on loans to those <740

• Interesting: same person may a few slightly different FICO scores at a single time - depending on type of lending they are applying for (mortgage, automobile, credit card) as these are calculated with slightly different parameters

How FICO scores are calculated

• The FICO® Score is calculated from 5 categories of of credit data in your credit report (see left)

• The most important being Payment History behaviour (35% weightage) and Current Amounts Owed (30% weightage)

• Late payments will lower your FICO Score, but establishing or re-establishing a good track record of making payments on time will raise your score.

• NOTE the “New Credit” factor (10%) - You credit score is generally lowered when you open multiple new credit accounts; the number of times a lender has requested for your credit report in past 12 months as both these are interpreted as events that increase your risk of defaulting/deliquency

• A score is a “snapshot” of your risk at a particular point in time. It changes as new information is added to your bank and credit bureau files

• Learn more here http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx and here: http://www.myfico.com/CreditEducation/WhatsNotInYourScore.aspx

What doesn’t count towards your credit score

(what FICO ignores)

• Oddly enough, a person’s income/occupation/employment history is not considered when calculating a credit score - banks usually request this separately

• For small business, credit scores do not give a discount for age or length of time in the US. Recent immigrants and younger people simply have a shorter credit history

• Many married couples tend to share credit cards or loans in a joint account, often under the husband's name. Credit history as a couple also doesn’t count. Women would need to get some bills and credit cards in their own name to establish a separate credit history from your husband. Many married women don’t until they get separated, and it takes time to build your score

Read more: http://www.bankrate.com/finance/credit-debt/10-ways-women-can-build-credit-1.aspx#ixzz2KukZXyB8

Women have lower credit scores, but greater potential

for improvement.

Source:survey conducted by Quizzle of more than 800,000 Americans

How you can Build Your Credit

• Limit yourself to 2-3 credit cards, the more credit accounts the lower the score

• When you close accounts, close them gradually - even when closing joint accounts in a divorce

• Credit in your own name!

• Pay every bill on time. Never late and never forget. Each missed payment erodes your creditworthiness

• Source: http://www.bankrate.com/finance/credit-debt/10-ways-women-can-build-credit-1.aspx

How Person X learns

their credit score

• Under the Fair Credit Reporting Act, a consumer is entitled to a free credit report (but not a free credit score) within 60 days of any adverse action (e.g. being denied credit, or receiving substandard credit terms from a lender) taken as a result of their credit score.

• Under the Wall Street reform bill passed on July 22, 2010, a consumer is entitled to receive a free credit score if they are denied a loan or insurance due to their credit score.[23]

Really good document on credit & impact on financial

exclusion and financial access

•Federal Reserve System’s Report to the Congress on Credit Scoring and Its Effects on the Availability and Affordability of Credit

• http://www.federalreserve.gov/boarddocs/rptcongress/creditscore/creditscore.pdf