Consumer Credit and Interest Rates

Created by the Fair Isaac Corporation, the FICO scoring system was created to ensure that all consumers are given a fair interest rate based on that individual’s risk classification; however, there are many factors that the FICO scoring system fails to take into consideration. The current system provides an admirable starting point when viewing consumer’s credit history, but lenders should dig a little deeper to warrant a consumer’s interest rate. When it comes time to purchase on credit, consumers should not be assessed solely by their FICO credit score; instead, lenders should contemplate special circumstance (divorce, identity theft, the death or illness of a spouse, or no previous credit history) and debt to income ratios to determine risk categories.
According to Fair Isaac Corporation (2001-2010), “90% of the largest banks use [a consumer’s] FICO credit score for a credit decisions” (Get your FICO score. Free, Para. 2). A credit score is a three digit number ranging from 300 to 800 and a higher number means a consumer’s credit score will be better. When a consumer’s credit score is good, that individual can obtain credit easier with a lower interest. However, what will a lender see in a consumers credit file? A credit score has five parts and each part is only a percentage of the total credit score. Payment history is the highest at 35%, how much a consumer owes is 30%, length of a consumer’s credit history is another 15%, new credit accounts for another 10%, and other factors make up the last 10% of a credit score. By law lenders do not have access to race, color, religion, national origin, sex, and marital status (Consumer Federation of America and FICO, n.d.). Experian, Transunion, and Equifax are the three credit reporting agencies that a lender will view reports from. The Fico scoring system is a suitable starting point when determining a consumer’s risk category, but lenders neglect to see the whole picture and this could cause a deserving consumer to...