The "Old Credit System" vs "FICO Credit System" ?
What is credit?
Credit is your ability to acquire debt. Unfortunately most Americans, are not aware that in the year 2000, this country switched to a radically different system, the FICO credit scoring system.
Fair Isaac Corporation (FICO)
The FICO credit scoring system, changed the way we access capital, the way we restore our credit, and the way we eliminate our debt. Before 2000, credit evaluation was a merit-based system, it is called the old credit system. So if I asked you, how is your credit? What I’m asking is, do you pay your bills on time?
So you could confidently say, “hey, you know, well, I pay my bills on time, I have good credit, no problem”.
The FICO system, I’m asking you, what is your credit score? FICO is an analytics software company that develops products for businesses and consumers. The FICO score is the result of an algorithm.
So now, I’m asking what is your score? If you have less than a 700 credit score, you have bad credit, if you’re over a 700 credit score you are deemed to have good credit. So now I’m asking you, do you understand the system that controls credit? So it’s a much more complicated process?
Does anybody in the world understand the system that controls it? Well, this is how I show people that really, you probably need a little more education. And when I do workshops, I start by asking you, what does FICO stand for? FICO is the new system. It’s called the FICO credit scoring system. So what does Fico stand for? stand for it. It stands for the “Fair Isaac Corporation”.
History of FICO
The reason it’s important to know the history of FICO is that Congress mandated that all consumers learn the system. So if you don’t know that name, it’s very difficult to prosper in the credit-based system we have. So by knowing it’s name, you should visit FICO’S website https://fico.com.
So if you go to my fico.com, you’ll see that credit now has five components versus two in the old merit basis.
The #1 component is your payment history. Okay, your payment. This is very important because your payment history is only 35% of your score. In the old system, it was closer to 80%. So now it’s only 35%. If you remember from grade school if you get 35% on a test. What’s that? Yes, that’s, a fail. The problem for most Americans is they’re focused on their payment history, only.
When they think of credit repair or fixing their credit to get their income tax dollars, they only focused on their payment history, removing negative stuff is important, but it’s only 35% of your score. The problem therein lies in the other components.
The #2 component is utilization. The Fair Isaac site, they will tell you that’s about 30%. I wrote an algorithm to understand how the model behaves exactly. My research proved credit utilization was closer to 40% of your score. So the single biggest component of your credit is not your payment history, but your utilization of major revolving items. The 2 types of accounts are major revolving and minor revolving.
A major revolving account is credit cards or lines of credit, issued from a bank.
Department stores cards, will not help you as much and can hurt you. So your major revolving is 40%.
Anytime someone looks at your credit, that you authorized becomes an inquiry. Once you achieve more than 20 inquiries, you will lose about 5 points per inquiry. So you have to be very careful.
We’re in a different world, anybody could look at your credit, you could shop for rates. So if you’re going to buy a house or a car, you could go to five different financing sources to see who gives you the best numbers. If you are rate shopping for a loan or mortgage, it is best to pull your credit report before you begin your shopping to know your FICO score and statistics.
When you purchase your credit report, this counts as a soft inquiry that will not harm your FICO score.
I hope this short explainer gives you a better understanding of what is credit and how the FICO system works.
In the United States, a consumer’s FICO score is to be guarded. If you have questions about your FICO score or your FICO needs improvement, contact our offices for information on our restoration programs.
Until next time…
“FICO” is a registered trademark of the Fair Isaac Corporation.