Part 1 - Risky Business; Identifying And Understanding Financial Risks Before Taking Them

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By Mia Bolaris-Forget

With millions of North Americans in debt, wouldn’t it be great to prevent the problem before it happened. And wouldn’t it be wonderful to rate your risk of financial success (or failure) before you established “bad” habits or made any potentially “risky” investments?

Well, now there just might be a way you can, and it has nothing to do with “genetics” or ESP. This is especially important for those of you who are considering taking out a mortgage, car loan or any other personal loan. Why? Because knowing what lenders are looking at or for may just help you ensure “getting” your loan…and what interest rate you will be assigned.

In addition to the “traditional” credit report lenders may also rely on a credit score to determine if they want to do business. A credit score is a report purchased highlighting your risk worth. The score is calculated via a mathematical equation geared at evaluating several factors on your credit report, comparing the information to the patterns in hundreds of thousands of past credit report and assigning you a score that assesses your level of future credit risk.

The only way for a FICO® score to be determined based on your credit report; your report must reflect at least one account that has been active for at least six months. Furthermore, the report must contain one account that has been updated in the past six months. This gives lenders enough current information to “confidently” evaluate your situation and assign you a score.

Defining FICO®

FICO® scores are basically credit bureau scores. They are furnished to lenders by three major credit reporting agencies including” Equifax, Experian and TransUnion. These scores outline future risk as a direct result of information of your credit report. The higher the score the lower the risk. However, the assigned number does not help determine if someone will be a “good” or “bad” customer. Additionally, while many lenders rely on FICO scores to assist them in their decision making process, each (lending) organization has its own strategy, including the acceptable level of risk for a specific credit product. There is in fact, NO single “cutoff score” universally allotted to all lenders. And, many additional considerations my go into determining your actual interest rates.

FICO By Any Other Name:

FICO scores are known to have various aliases. The name of each differs depending on which of the three agencies generates the report. Still, they are developed using the same (Fair Isaac) methods, and each has been thoroughly tested for quality assurance and to reflect the most accurate overview of potential credit risk using credit report data.

Credit Reporting Agency ~ FICO® Score
Equifax ~ BEACON®
Experian ~ Experian/Fair Isaac Risk Model
TransUnion ~ EMPIRICA®

Multiple Scores:

Referring to “your score” basically refers to your current FICO score. Yet, according to financial authorities, it is actually more than just one determining score:

· Determining Scores: Generally speaking many lenders use their own score in conjunction with the FICO scores, and in addition to other information about you before making a final decision.

· FICO: Only One Of Many Scores: While FICO scores definitely lead in popularity, there are a variety of other commonly used credit bureau scores implemented by lending agencies. These other scores my evaluate your credit report differently than FICO scores, and sometimes even assign you a higher score, implicating greater risk.

· Differences Among The Agencies: Your FICO score may fluctuate among each of the credit reporting agencies. This is because each score only accounts for the data in your credit report at that agency…and chances are they may significantly differ.

· FICO Changes Over Time: Your score varies and changes not only due to the information provided but also based on changes in your credit report. Your current FICO probably differs from even a recent but past FICO based on changes in your credit report, “good” or “bad”.

Continue To Part 2 - "The Components Of Your Score" >>