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Financial Literacy - Credit scores
SPOTLIGHT
Craig Watts
This FICO expert offers tips for improving credit scores and clears up some common misconceptions.
Credit scoring, demystified

Interview: Craig Watts

It's easy to become confused about credit scores. Myths abound about how to improve a credit score, what goes into a credit score and which credit scores warrant attention.

To put certain misconceptions to rest, we caught up with Craig Watts, public affairs manager for Fair Isaac Corp., the company invented the FICO score -- the score that most lenders use to assess their applicants' credit risk.

Inside story on credit scores
What's a credit score?
Score factors
Credit history
What are consumers most confused about when it comes to credit scores?

People tend to be confused about how lenders use credit scores and how individuals can most effectively manage their own scores. Plus, the name itself, credit scores, is confusing. In the U.S., scores tend to be final judgments. It's the score you got on a math test, or the score your football team got. They're final and absolute.

In the world of analytics, a risk score is more like a snapshot. It's isnít a final judgment because the underlying basis for the score is constantly changing. That's true whether you're talking about a credit risk score like the FICO score, or other types of analytic scores that might be assessing someone's future behavior based on how what they've put on a credit application Ė called an application score -- or how they've managed their account, called a behavior score.

In many cases consumers don't realize how much other information goes into credit decisions. Credit scores tend to be a lightning rod for consumers. While they are certainly important to many lending decisions, credit scores usually don't drive the ultimate decision. The lender is considering other information as well.

OK, so you think that most people would be surprised to know that credit scores are not a final judgment. They can change.

Yes. Credit scores are quite flexible and consumers have a surprising amount of control over their own credit score.

Something what I think surprises people is the emphasis that a person's full credit history has on their credit score, rather than simply where their credit relationships stand today. Oftentimes, we get asked questions by consumers that suggest they think that closed accounts should be removed from their credit histories because they are no longer active, no longer part of the person's credit dossier, if you will. But in fact, closed accounts are a valuable part of a person's credit history and of keen interest to lenders, to other businesses and certainly to scoring companies such as Fair Isaac. Closed accounts can add a great deal of value when predicting someone's credit risk and similar behaviors.

-- Posted: June 18, 2007
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