Fianl Essay

The Fair Credit Scoring System.

By

Rafael Rueda

University Composition and Communication II

Axia College

Instructor: Susan Kohanek

November 6, 2011

With the country in a seemingly never ending recession and the economy bleeding out, Americans are falling into an abyss of debt that can be difficult to climb out of. Now more than ever businesses need to adhere to the credit scoring system to protect themselves and us, the consumers from defaulting on our accounts. Credit scores are a fair and necessary measurement to help lenders determine wether or not an applicant would be a safe investment.

What is a credit scoring system? The system, originally created by FICO (Fair Isaac Corporation) in 1956 is a mathematical algorithm designed to measure the risk a lender would take on (Wikipedia). FICO’s formula components: 35% payment history such as delinquencies and late payments, 30% Credit Utilization that is the ratio current credit balance to total credit limit, 15% is the length of credit history (as the credit history gets older, it can have a positive impact on the score), 10% types of credit used that can be beneficial if the consumer has a history of managing different types of credit such as installment, revolving, consumer finance, mortgage. The final 10% is based on recent searches for credit. Applying for new credit can be harmful for a consumer’s score (Wikipedia). The FICO scoring range is between 300 and 850 with the median score averaging at 723 (Creditratings101.com). The higher the score, the lower the risk you are and the less interest you end up paying because by paying your bills on time and keeping to the contracts, you are proving your ability to be trusted with credit. It is a system that rewards honesty and diligence. Fair Isaac sold its’ first credit scoring system in 1958 and went public in 1987, the same year that Equifax made its’ debut. Although there are many others, Fair Isaac’s FICO score is the most widely used and trusted...