90% of of all major USA lenders base their lending decisions on FICO Scores (source: FICO). It is important, thus, to understand a) what aspect of credit risk is a FICO score is actually designed to predict b) What DOESN'T it actually take into account c) How do the specific inclusion of some factors, weightages, and the exclusion of other factors impact different types and groups of lenders - basically who ends up being left out of bank-lending based on how credit scoring is performed? These are my compiled self-study notes. They are intended to be a compilation of facts gathered and not intended to express any viewpoint either for/against credit score methodologies currently in practice.

1. Credit Scores &
Financial Exclusion
A Growing Cheatsheet for Kiva Zip fellows,
by Kiva Zip fellows

2. A Credit Score
• Numerical expression based on a statistical analysis of a person's credit files, to
represent the creditworthiness of that person.
• in other words, the “likelihood that people will pay their bills”
• PRIMARILY based on credit report information typically sourced from credit bureaus.
• Used by lenders (banks, credit card cos) to evaluate potential risk of lending to a specific
person
• In most cases, your credit score determines (a) whether you qualify for a loan at all, but
also (b) how much you can borrow (loan or credit limit), (c) at what cost (interest rate)
• Credit scores are also used by mobile phone companies, insurance, gov departments,
property companies. As such, beyond their original function of representing credit
worthiness, credit scores have become a sort of numerical shorthand for “how risky /
trustworthy is this person” to do business with

3. How to read
FICO scores
• FICO scores
FICO, previously known as Fair Isaac Corporation, is the most widely known credit score in the US,
used by most credit bureaus and financial institutions
• 90 of the top 100 largest U.S. financial institutions use FICO to make consumer credit decisions
• Inputs and parameters are designed to “predict the likelihood that a consumer will go 90
days past due or worse in the subsequent 24 months after the score has been
calculated”
• FICO Scores range between 300 - 850
• 623 being the median FICO score of Americans in 2010
• historically, scores >620 are considered “prime”, with those below considered “sub-prime”
• However in recent years, mortgage lenders and insurers have tightened it even more - many large
institutions will NOT insure mortages of those with scores <660, or will charge extra on loans to
those <740
• Interesting: same person may a few slightly different FICO scores at a single time - depending on
type of lending they are applying for (mortgage, automobile, credit card) as these are calculated
with slightly different parameters

4. How FICO scores are
calculated
• The FICO® Score is calculated from 5 categories of of
credit data in your credit report (see left)
• The most important being Payment History behaviour
(35% weightage) and Current Amounts Owed (30%
weightage)
• Late payments will lower your FICO Score, but
establishing or re-establishing a good track record of
making payments on time will raise your score.
• NOTE the “New Credit” factor (10%) - You credit score
is generally lowered when you open multiple new credit
accounts; the number of times a lender has requested
for your credit report in past 12 months as both these
are interpreted as events that increase your risk of
• Learn more here defaulting/deliquency
http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx
and here:
http://www.myfico.com/CreditEducation/WhatsN
• A score is a “snapshot” of your risk at a particular point
in time. It changes as new information is added to your
otInYourScore.aspx
bank and credit bureau files

5. What doesn’t count towards your
credit score (what FICO ignores)
• Oddly enough, a person’s income/occupation/employment history is not
considered when calculating a credit score - banks usually request this
separately
• For small business, credit scores do not give a discount for age or length of time
in the US. Recent immigrants and younger people simply have a shorter credit
history
• Many married couples tend to share credit cards or loans in a joint account, often under
the husband's name. Credit history as a couple also doesn’t count. Women would need
to get some bills and credit cards in their own name to establish a separate credit history
from your husband. Many married women don’t until they get separated, and it takes
time to build your score
Read more: http://www.bankrate.com/finance/credit-debt/10-ways-women-can-build-credit-1.aspx#ixzz2KukZXyB8

6. Women have lower credit scores,
but greater potential for
improvement.
Source:survey conducted by Quizzle of more than 800,000 Americans

7. • Limit yourself to 2-3 credit cards, the more credit
How you can Build Your Credit
accounts the lower the score
• When you close accounts, close them gradually - even
when closing joint accounts in a divorce
• Credit in your own name!
• Pay every bill on time. Never late and never forget. Each
missed payment erodes your creditworthiness

8. How Person X learns
their credit score
their credit score
• Under the Fair Credit Reporting Act, a consumer is entitled to a free credit
report (but not a free credit score) within 60 days of any adverse action (e.g.
being denied credit, or receiving substandard credit terms from a lender) taken
as a result of their credit score.
• Under the Wall Street reform bill passed on July 22, 2010, a consumer is
entitled to receive a free credit score if they are denied a loan or insurance due
to their credit score.[23]

9. Really good document on credit &
impact on financial exclusion and
financial access
• Federal Reserve System’s Report to the Congress
on Credit Scoring and Its Effects on the Availability
and Affordability of Credit
• http://www.federalreserve.gov/boarddocs/rptcongre
ss/creditscore/creditscore.pdf

10. Really good document on credit &
impact on financial exclusion and
financial access
• Federal Reserve System’s Report to the Congress
on Credit Scoring and Its Effects on the Availability
and Affordability of Credit
• http://www.federalreserve.gov/boarddocs/rptcongre
ss/creditscore/creditscore.pdf