As credit score calculations have expanded to include less traditional data, the score has become a requirement for government-insured loans. But borrowers should treat these three-digit numbers as assets because there are plenty of criminals that will steal them.
FICO scores, used by most mortgage lenders to determine a borrower's level of future credit risk, are derived from data reported by the "Big Three" national credit-reporting agencies -- Equifax, Experian and TransUnion. Each independently collects data from creditors, public records agencies and other sources of financial information, then uses software developed by Fair Isaac and Company to formulate a credit score, according to myFICO.com.
In May 2004, to help FHA improve the risk management of its loans, it became a requirement for lenders to input a credit bureau score when underwriting an FHA loan on all instances in which one was obtained from a credit report.
By July, Fair Isaac extended its standard-setting FICO score to cover an expanded population base by tapping into nontraditional sources of consumer data such as payment performance on deposit accounts, pay day loans and product purchase payment plans. The extension was created to give "lenders and other businesses another powerful tool for building and growing their presence in high-demand and emerging markets, while expanding service options for consumers who have missed out on opportunities simply because they lack a traditional credit history."
The traditional data evaluated to calculate a FICO score is that found in a consumer's credit file, which shows what types of credit are used, the length of time accounts have been open, how much credit has been used, whether new credit sources have been sought and if bills have been paid on time. To calculate the classic FICO a consumer's report must contain at least one account that has been open for at least six months, the site said.
In determining the score, each category (based on the general population) has a certain weight or importance: Payment history 35%, amounts owed 30%, length of credit history 15%, new credit 10% and types of credit used 10%.
In analyzing a large sample of credit information on people who recently obtained new credit, Fair Isaac said it found that, on average, today's consumer has a total of 11 credit obligations, including installment loans such as mortgages, on record at a credit bureau; is paying bills on time as 85% of all consumers have never had a loan or account 90 days or more past due and less than 10% have ever had a loan or account closed by the lender due to default.
The median FICO score is reportedly 723.
Because the cost of a mortgage depends heavily on a credit score, myFICO.com advises consumers to review their credit reports from each credit reporting agency at least once a year.
Several studies have determined that a large percentage of credit files have errors. One study released by the U.S. Public Interest Research Group reportedly determined that 25% of credit reports "contained errors serious enough to result in the denial of credit," and that 79% contained mistakes of some kind.
myFICO.com says that when a credit report contains errors, it is often because it is incomplete or contains information about someone else.
In a study earlier this month, the Federal Trade Commission said ID theft continued to be the most common form of fraud and that about 3,000 consumers last year alleged their identity was used by someone else for a real estate loan -- up from 2,200 in 2003.
Such fraudulent activity has lead to a new rule in consumer data destruction -- starting in June, the commission will require that lenders properly dispose of consumer reports or any record derived from one.
Additionally, Equifax and myFICO.com recently made available a tool that allows consumers to track their FICO credit score. The tool monitors a credit file for changes that can affect a consumer's FICO score. Once a change is detected, it alerts the consumer via email or wireless text message, advising them to visit a secured Web site for a detailed explanation of the change in credit status. An up-to-date score is included if the credit score changes by a significant amount due to changes in the credit file, according to an announcement.
The tool "is the only monitoring service that helps consumers check and manage their FICO credit score," said Cheri St. John, a Fair Isaac vice president, in the announcement. "It provides consumers with an effective and affordable tool for keeping a close eye on the most important measure of their credit health."