Weird Interesting Facts About Credit
Credit Scores and More
According to a recent study by Experian, Gen Yers have the lowest Vantage Scores of the four generations (the Vantgage Score was established in 2006 by the three main credit bureaus to compete with Fair Isaac’s FICO score). Gen Y has a credit score of 672, Gen X (ages 30-46) has an average score of 718, Baby Boomers (47-65) have a 782, and the Greatest Generation (66+) have an average of 829.
Credit Score Facts Credit scores increasingly influence dating decisions
There is an online dating service called CreditScoreDating.com for those who are concerned with the financial situation of a potential mate. The site’s motto is “Credit Scores Are Sexy.”
One in 4 unemployed Americans have been required to go through a credit check when they applied for a job. One in 10 has been denied a job due to information on their credit report.
On average, African-American and Latino households have worse credit scores than white households.
Not everyone has a credit history. If someone has never had a credit card, he or she will not have a credit or FICO score.
Occupations that regularly check an applicant’s credit score are 1) parking booth operator, 2) the military, 3) accounting, 4) mortgage loan originator, 5) Transportation Security Administrator (TSA), 6) law enforcement, and 7) temporary service positions.
As late as the mid-1990s, many South African credit scores considered the color of the borrower’s skin. Lower scores would be calculated for black consumers.
Credit scoring has been around for several decades, and by the end of the 1970s, most major lenders used some kind of credit scoring formula to decide whether to accept or reject applications.
The Bangladesh-based Grameen Bank uses gender in its credit scoring model and lends exclusively to women. Women are seen as more responsible borrowers than men.The widely used FICO (Fair Isaac Corporation) score is based on the work of engineer Bill Fair and mathematician Earl Isaac who founded the firm Fair Isaac in 1956. They developed the first credit bureau-based scoring system in the mid-1980s. The FICO score is based on the behavior of millions of borrowers. The model looks for patterns in behavior that indicates a borrower might default, as well as patterns that indicated a borrower is likely to pay.
Credit scoring is one of the reasons why consumer credit exploded in the 1990s. Lenders had more confidence lending to wider groups of people because they had a more precise tool for measuring risk. Scoring also allowed them to make decisions faster.
The total volume of consumer loans (credit cards, auto loans, and other non-mortgage debt) more than doubled between 1990 and 2000, to $1.7 trillion.
The amount of credit card debt outstanding rose nearly three-fold between 1990 and 2002, from $173 billion to $661 billion.
Home equity lending soared from $261 billion in 1993 to more than $1 trillion 10 years later.
Credit scoring got a huge boost in 1995 when the U.S.’s two largest mortgage-finance agencies, Fannie Mae and Freddie Mac, recommended lenders use FICO credit scores. Their recommendation carried enormous weight in the home loan industry.
Initially, when consumers tried asking for more details about their FICO and credit scores, Fair Isaac, the leader in the credit-scoring world, wanted to keep how they calculated scores a secret. The company said it worried consumers wouldn’t understand the nuances of credit score or they would try to change their behaviors to boost their score. Finally, in 2000, they caved into pressure and listed 22 factors that affected a person’s score on their site. And in 2003, Congress passed a law that gave people a right to see their score.
In 2011, a portion of the Dodd-Frank financial reform bill required lenders to disclose credit scores to applicants.
Credit scoring is rife with controversy, including vulnerability to errors. The rise in automated lending decisions, the billions of pieces of data handled each day, as well as the explosion of identity theft has left major rooms for error in scoring.
Identity Fraud Identity theft can destroy a credit score
More than 8 million people fall victim to identity theft in the U.S. each year. Consumers spend hundreds of millions of hours trying to resolve the problem, stop the fraud, and clear up their credit reports.
Credit scoring has been criticized for its complexity. The variety of different scoring formulas and different approaches among lenders causes confusion for consumers and mortgage professionals alike.
In the United Sates, credit scores don’t factor in income, race, religion, and ethnicity. However, it is not clear whether the result of these formulas is actually nondiscriminatory. For example, seasonal work is prevalent in some neighborhoods, which can lead to a higher rate of nonpayment in the off-season.
A person does not have one credit score. They have many, and they change all the time. There is more than one credit-scoring system. In fact, currently more than 100 credit-scoring models are being marketed to lenders. The best known score, however, is the FICO, and a person is more likely to be affected by their FICO score than any other.
The classic FICO formulas need at least one account on a credit report that has been open for 6 months and one account that’s been updated in the past 6 months.
Credit-scoring systems were designed for lenders, not consumers. This means that scores weren’t created to be easy to understand, and the actual formulas and the details of how they work are closely guarded trade secrets.
Many lenders use 720 or 740 as the cutoff for giving borrowers their best rates and terms. Many also use 660, 640, or 620. Borrowers below those numbers are called “subprime.”
The “Great Recession” had a significant impact on the credit-scoring world. More people fell into the lower brackets: 25% had scores under 600 in October 2010, compared to 15% in 2006.
Insurers have discovered a strong link between the quality of a person’s credit and the likelihood a person will file a claim. The worse your credit score is, the more likely you will cost an insurer money. The better your credit is, the less likely you will have an accident or suffer an insured loss.
Credit Affects Insurance Insurance coverage often depends on a credit score
More than 90% of homeowners and auto insurers use credit scoring to decide who to cover and what premiums to charge. Many consumers and consumer advocates are outraged that homeowners and auto insurances use credit scoring to determine whom they will cover.g
About half of Americans don’t have a single late payment on their credit reports. Approximately four in 10 have been 60 days or more overdue in the past 7 years.
The five most important factors that affect a FICO score are 1) payment history (35%), 2) how much you owe (30%), 3) how long you’ve had credit (15%), 4) your last application for credit (10%), and 5) the types of credit you use (10%).
To get the highest possible credit scores, a person needs both revolving debts, such as credit cards, and installment debts, such as mortgages or auto loans.d
Major credit cards (VISA, MasterCard, American Express, Discover, and Diner’s Club) are typically better for a credit score than department or finance companies.
The average American has 13 credit accounts showing on their credit report, including nine credit cards and four installment loans.
A high credit score can save a person tens of thousands of dollars in mortgage interest, lower auto insurance premiums, and can even increase the likelihood of getting hired.
Most Americans use less than 30% of their available credit limits. Only 1 in 6 uses 80% or more.
In the United States, there are three major credit bureaus: Equifax, Trans , and Experian. Each bureau tracks how credit is used and each issues its own credit score. Because each bureau has slightly different information, their scores tend to vary, sometimes significantly.
There is a difference between credit reports and credit scores. Reports show a person’s history of using credit, including both opened and closed accounts, payment history, credit limits, and amounts owed. The score (a FICO score) is based on this information and ranges from a low of 300 to a high of 850.
Under the Fair and Accurate Credit Transactions Act (the FACT Act), a person can get a free credit report once each year from each of the three major credit bureaus by going to AnnualCreditReport.com. However, these reports do not include the FICO credit score.
Credit scores affect more than home mortgage rates and car loans. They also affect how much a person pays for car insurance. Additionally, employers and landlords can pull credit reports on potential employees and renters.
A person getting his or her own credit report does not hurt the score. However, inquiries by creditors from whom a person has applied for credit can lower a score.
Maxing out credit cards damages credit scores by 10 to 45 points.
Foreclosure and Credit A credit score can recover, even from a foreclosure
Even with a bankruptcy or foreclosure, it is still possible to improve a credit score. Negative references do not remain on credit reports forever.
Some variation of the FICO score is used in 19 countries outside the U.S.
Over 144 million people, or 2/3 of American adults, haven’t looked at their credit report in the last year.
Over 1/3 of Americans adults admit that they do not know their credit score.
Closing credit card accounts will hurt a credit score. Experts recommend keeping the oldest card active as along as possible, even if it is used just once or twice a year. The longer a card is open, the more it positively affects a credit score. Length of credit history makes up 15% of a person’s credit score.
Closing a credit card line can hurt the all-important credit utilization ratio by reducing the amount of credit someone is approved for compared to his or her total amount of debt.
Increasing credit card limit can boost a credit score as long as the card is not maxed out.
A negative mark on a credit history disappears after seven years. So if an unpaid debt is close to this cutoff date, a person may want to let it be. Additionally, if someone makes a payment to an old debt, the debt may be “re-aged” so it looks like a recent problem. Newer negative activity is weighed more heavily than older activity.
Credit Score Facts Different types of debt affect credit scores differently
Not all debt affects a credit score equally. “Installment debt,” such as student loans and mortgages, don’t take as large a toll because they are paid off in installments. However, “revolving debt,” such as credit card debt, lowers a credit score much more.
Your credit utilization rate, or how much you can borrow, is a significant part of a credit score. Experts suggest not going over 30% of your credit line. For example, if a credit card as a $5,000 limit, you should not spend over $1,500 on that line.
While paying a bill late is never a good idea, late payments are usually not reported to credit bureaus until 30 days overdue.
What Damages a Credit Score?
1. Paying a credit card late
2. Forgetting about a bank account with a tiny balance
3. Closing a credit card account
4. Opening too many store credit cards
5. Blowing off parking tickets
6. Not paying income taxes on time
7. Losing track of unpaid utility bills
8. Not paying library fines
9. Cosigning an auto loan with a child
10. Errors on a credit report