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Chapter 11. CREDIT REPORTS > Credit Scoring

Credit Scoring

If Grantland Rice was right and it isn't important whether you win or lose, why do they keep score? Let's face it; whether it is a student's SAT score, the Red Sox-Yankee score, or your credit score that can determine whether you are extended credit and at what rate, scoring is important. Your credit score, as contained on your credit report, is of particular importance.

If You Can't Beat Them, Join Them

I've Got a Secret was the name of a popular television quiz show from years ago. It also, until recently, could have described the manner of doing business of Fair Isaac & Co., a business whose creditworthiness scores are used by companies throughout the business world in determining whether or not to grant credit to applicants. Beginning in the 1950s, a number of companies, the most prominent of which is Fair Isaac, have used complex formulas to analyze the information contained in individual credit reporting agency files to arrive at a number or score that evaluates a person's creditworthiness. For years, Fair Isaac protected its secret formula for credit scoring believing that if people knew how credit scoring was done, they would try to manipulate the system. In 2001, Fair Isaac decided that it would disclose a full list of the factors that go into the score and the statistical weight that it gives each element. They beat the California legislature to the punch—it was about to pass a law requiring Fair Isaac to make their scoring system public. These scores that are called FICO scores have been used not just for mortgage applications, but also for other consumer loans and credit card application evaluations. Armed with this information, consumers can now see how their actions affect their credit.


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