AS YOUR DEBT RISES SO MIGHT YOUR FICO SCORE… AND THIS IS A GOOD THING

This week’s fascinating real estate topic is credit related…Didja know that, on average, people who incur debt that is higher than the national average have a higher FICO score than people who owe less than the national average? Go figure. Experian Consumer Direct, one of several credit information bureaus used to calculate FICO scores, conducted this study.

A FICO score is your credit profile. Credit scores indicate the risk of not repaying a loan. It also affects the rate of your mortgage when you apply for a loan to purchase or refinance a property. Lenders rely on your credit score to assess your risk of default. FICO scores are calculated by the Fair Isaac Corp. (NYSE: FIC). Their scoring model incorporates information from three credit information bureaus: Equifax, TransUnion and Experian. Each credit bureau takes a singular approach to rating risk. Each bureau runs different software scoring models — all developed by Fair Isaac Corp. As design would have it, these scoring models rarely come up with the same number. As logic would have it, FICO’s cumulative scoring software weighs and balances data more efficiently and precisely than human underwriters.

Stephen Brobeck, executive director of Consumer Federation of America and Providian Financial, believes that credit scores should become another key number, such as weight and bank balances, that Americans keep track of on a regular basis.

A FICO score above the low 700s usually qualify people for the lowest rates – the ones they advertising on commercial. A score below the low 600s may mean you are denied credit or have to pay a higher, sub prime rate.

A recently passed ruling now allows consumers to manage their credit score by reviewing their credit report on a regular basis. You are now entitled to a free credit report annually from all 3 credit reporting companies. Visit https://www.annualcreditreport.com/cra/index for more information.

Now that you know what you’re looking at, here are some fascinating credit score statistics. This test was conducted by Experian Consumer Direct, one of FICO’s three credit information bureaus:

• 677 is the average Experian PLUS Score in the United States.
• 672 is the average Experian PLUS Score in California.
• 669 is the average Experian PLUS Score in the Los Angeles Area.
• U.S. consumers have an average debt of $11,224 compared to last year's average debt of $10,024. This means U.S. consumers' average debt is 12 percent higher compared to the same time last year.
• 25 percent of U.S. consumers have debt above the national average. Their average Experian PLUS Score is 695.
• The average PLUS Score for consumers with debt below the national average is 671.

This Experian study was compiled using the Experian National Score Index, which is based upon a nationwide sampling of 3 million consumer credit profiles. The index is updated monthly with the most recent Experian data regarding U.S. consumers' credit and is a powerful indicator of the nation's overall financial health.

This information is part of nationwide trend commitment to educate consumers about credit. The Experian National Score Index was formulated using the Experian-developed PLUS Score. It is designed to give consumers a better understanding of how their credit compares to that of other U.S. consumers.

The index monitors several components of consumer credit behavior including average debt, credit utilization, and monthly payments, and is formulated using Experian's credit score model, called the PLUS Score. The PLUS Score is a numeric representation of financial behavior, based on information found in a credit report, and can range from 330 to 830 with a higher score indicating a lower credit risk.

The objective of FICO scores are to "rank the order of risk" concludes Sidney Weigner, who teaches credit scoring for the National Assn. of Mortgage Brokers.

Weigner observes that the scores use up to 40 variables to judge a person’s ability to pay back a loan. Payment history tends to be most important; coupled with an analysis as to how the borrower uses debt, compounded by how long they have had credit. Each credit bureau - Equifax, TransUnion and Experian - receives different information, and may give it different levels of importance. One repository might rank credit from a finance company higher than credit from a department store. A department store might report to one or two repositories but not all three; another creditor might report to only one credit bureau. What a tangled web financial analysts weave…