Personal Finance

Case Study (3):

FICO Scores

From different scores, investigate what a FICO score is. Use this site to estimate what yours might be:

http://www.whatsmyscore.org/ Explain what things go into making a FICO score. What are they used for other than getting a loan? Using your information from your credit report and life profile, what changes can you make that might improve your score?

FICO scores are used by many organizations to assess the risk of engaging in a financial relationship with an individual. These relationships may include monetary loans, employment or even housing rental agreements (Marquit, 2007). The FICO score is an effort to eliminate the labor intensive process of case-by-case risk assessment (whatsmyscore.org 2008). This scoring process also removes the possibility of personal feelings affecting the process as well as makes it faster and more efficient (myfico.com 2008). It is also important to remember that a FICO score is only a snapshot of your financial picture which can change over time.

There are five weighted factors that go into making the final FICO score; whatsmyscore.org (2008) summarizes it:

• Payment History (35%) , which includes account payment information, bankruptcy or judgments, how long overdue payments are, amount past due, and the time since any adverse occurrences.

• Amounts Owed (30%) , which includes the amounts owed on accounts individually and totaled together as a whole, number of accounts with balances, proportion of credit line used and proportion of installment loan amounts still owed.

• Length of Credit History (15%) , which includes the time since you accounts have been open as well as the time since your accounts have been active.

• New Credit (10%) , which includes the number of and time since recently opened accounts and proportion to total accounts, number of and time since recent credit inquires, and the re-establishment of positive credit history following past payment problems.

• Types of Credit Used (10%) , which includes the number of various types of accounts, like credit cards, retail accounts, installment loans, mortgage, etc.

Each of the categories above has another set of rules that go into making the sub-score which is then weighted and combined with the others. The final weighted score is published as the your FICO score. Several pieces of information are not included in the FICO. Aside from the obvious religion, sex, color, etc. age and the employment history are not taken into account. That included salary, employer, job title or employment dates (myfico.com 2008).

There are several factors that were identified as possible areas for improvement. First, making sure that any loan searching is accomplished in a short time frame. Myfico.com (2008) states “FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.” Last year I leisurely searched for possible opportunities to refinance my home, the search lasted about 12mo before I decided not to refinance. Six of the seven inquiries noted in my credit report were from that search (Experian, 2008).

The second thing that would improve my score would be to reduce my debt. I am currently at 27% debt to credit ratio for installment accounts; and 34% ratio for revolving accounts (Equifax, 2008). This has been a goal of mine for the last several years and we are working our way down, though it is still higher than it could be. Overall this is the single most significant thing that I can do to improve my score.

Reducing debt owed on my revolving accounts and ensuring that my payments continue to be on time for another two years. In by the end of 2009 I will have the only “30 day late” remark 7 years in the past. I will also continue to review my credit reports as well as my wife's. If there are any irregularities, we can take care of them early in stead of when we are trying to start a relationship with an organization.

Resources:

Equifax (2008). Personal credit report for Douglas Russell Libby II. Retrieved August 2, 2008 using www.anuallcreditreport.com

Experian (2008). Personal credit report for Douglas Russell Libby II. Retrieved August 2, 2008 using www.anuallcreditreport.com

Kapoor, Dlabay, Hughes (2008). Focus on personal finance: an active approach to help develop successful financial skills, 2nded. McGraw Hill Irwin, New York.

Marquit, M. (2007). What is your FICO score used for. Retrieved August 1, 2008 from: http://hubpages.com/hub/What_Is_Your_FICO_Score_Used_For

Myfico.com (2008), Credit education center. FairIssac.com. Retrieved August 2, 2008 from: http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx

Whatsmyscore.org (2008), Break the code. Whats My Score International. Retrieved August 2, 2008 from: http://www.whatsmyscore.org/break/

Personal Finance

Case Study (2):

Personal Credit Report Review

Get your personal credit report. You can do this free at this site www.annualcreditreport.com.

This will not affect your credit score. Federal law has established that you can review your report from the different agencies for free each year. If you use this site you will not be signing up for a service that will cost/bug you. I recommend you choose Equifax, but you can use any of them you want. Be sure and print it before you leave the site.

Take some time and analyze the information in front of you. Look over every section and see if it is accurate. What kinds of mistakes/errors did you notice? Any credit accounts that are not yours? What about the inquiries? What different types were listed? Anybody checking up on you that you did not know about? If there are irregularities, what are you going to do about them? Do not send me your credit report. That is for you to keep. Please send me your typed review/analysis.

Reviewing my credit report is something that I have not taken the time to do before. The only time it has effected me or I even thought about it was when I was looking at mortgages. The Broker would open a screen and casually look over the report and ask if everything looked correct. Nothing stood out as incorrect so we assumed that it was fine.

As recommended Equifax was used to review my credit report. The process for getting the report was simple and straight forward. In about two minutes all the information was entered and the link to the report was available. Equifax had a summary page that was very helpful by showing all the important information in one comparison. Each category had embedded links that took you to the next level of detail by category. Each category was also a summary but additional details for one or all of the line items was available.

The first task was to carefully review all the information presented. All the accounts were accurate, even the balances for the accounts in use were accurate within one month. It was interesting to see that some accounts that were opened (but never used) five to seven years ago were still considered “open”. Even recalling why some of them had been open was amusing.

Next on the agenda was to check for any problems or look at the payment history. I discovered that one account (a credit card) had been paid 30 days late in 2003. This was the only negative feedback found. (In discussing this with my wife we discovered that it was when my son was born and things were pretty stressful.) The rest of the payment history was boring and revealed nothing of surprise.

The last piece was looking at who and when organizations have been checking on my credit. There were 7 separate inquiries in the last two years that all happened while I was looking at refinancing my mortgage. This was stretched out for almost a entire year. I noted that according to whatsmyscore.org (2008) when shopping for credit, it is best to complete it in a short period of time. That way it is obvious that shopping for a good loan was the agenda, not gathering available credit to exploit. Then there were about six additional not shared inquiries mainly from credit companies trying to market to me.

Since nothing turned up on the Equifax report, Experian was next. Although Equifax was cleanly laid out and organized, Experian had more complete information. They had about 10 aliases listed in my report and two additional Social Security Numbers. They appeared to be mistyped or misread digits. Equifax, had only 3 aliases and the correct Social Security Number. Experian also had about 35 inquiries listed that were from credit companies trying to market to me, some had up to 6 inquires in one year.

This review was a positive experience and will be worked into the schedule of budgeting and financial planning. Getting the report was simple and the information contained in it was valuable. Spending an hour or so several times a year evaluating the credit report could be well worth it, especially if there are problems found and corrected.

Resources:

Equifax. Personal credit report for Douglas Russell Libby II. Retrieved August 2, 2008 using www.anuallcreditreport.com

Experian. Personal credit report for Douglas Russell Libby II. Retrieved August 2, 2008 using www.anuallcreditreport.com

Kapoor, Dlabay, Hughes (2008). Focus on personal finance: an active approach to help develop successful financial skills, 2nded. McGraw Hill Irwin, New York.

Whatsmyscore.org, Break the code. Whats My Score International. Retrieved August 2, 2008 from: http://www.whatsmyscore.org/break/