FICO score is one of the most important component of the decision making process by the banks while giving a loan to the customer. Hence it is important to understand the various components that go in to it and also evaluate the important variables that go looked in to while analyzing Credit Bureau data.

FICO score takes in to account 4 components

  • Payment history - 35%

  • # of accounts paid as agreed

  • Negative public records

  • Delinquent accounts

  • # past due items

  • How long one has been past due

  • How long its been since you had a past due payment

  • Amounts you owe - 30%

  • How much one owe’s on accounts & types of accounts with balances

  • How much of revolving credit lines one has used

  • Amt one owes on installment loan accounts vs original balances

  • 0 balance accounts

  • Length of Credit History - 15%

  • Total length of time tracked by your credit report

  • Length of time since accounts were opened

  • Time that’s passed since the last activity

  • The longer your (good) history, the better your scores

  • Types of credit used - 10%

  • Total number of accounts and types of accounts (installment, revolving, mortgage, etc.)

  • A mixture of account types usually generates better scores than reports with only numerous revolving accounts (credit cards)

  • New Credit - 10%

  • Number of accounts you’ve recently opened and the proportion of new accounts to total accounts

  • Number of recent credit inquiries

  • The time that’s passed since recent inquiries or newly-opened accounts

  • If you’ve re-established a positive credit history after encountering payment problems

  • In general, checking to make sure you aren’t attempting to open numerous new accounts

If one were evaluating the likelihood of a customer to refinance, what are the factors that would be of significance from a Credit Bureau data ? New Credit related variables do have a significant say as they suggest payment squeeze of a customer.Amounts a customer owes also has an impact on the propensity to refinance.

Why should one look at the credit bureau data ?
A customer who is undergoing a payment squeeze would show the following characteristics:
High Open trades in the recent months
High utilization on the revolving trades , bank card trades in the recent months
Derogatory accounts,
Higher % of revolving accounts

How does one go about analyzing the utilization on various accounts?
The total amount of credit outstanding is an indication of risk. Generally, higher total balances, or high balances on a number of accounts, indicate greater risk. It is also important to analyze the amount and types of outstanding credit compared to the total credit available.

For installment accounts, review the date the account was opened and the outstanding balance. A large installment debt that has been open for more than a year and has been paid as agreed is generally an acceptable risk, even though the outstanding balance may still be high.

For revolving accounts, compare the total outstanding balances to the total line limits. A pattern of revolving accounts at or near their limits, especially if they are new accounts, indicates that the borrower may become over-extended. It may also indicate that the borrower is only making the minimum required payments and could be at his maximum payment capacity.

There are a lot more aspects to the analysis..’ll continue in the next post