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Applied Research
** This is a sample of my professional applied research. This is a background paper I wrote on the topic of “American’s and the Perception of Their Financial Report Card.” I was interested in researching the topic further for my Integrated Communication Research course because I wanted to know how aware American’s were about the health and effects of their FICO score. **
American’s and the Perception of Their “Financial Report Card”
With the economy’s current financial state, lenders have become increasingly demanding on consumer credit expectation. What might used to be considered “good credit” is now not good enough. As an article titled Win at the Credit Scoring Game states, “Borrowing money today requires impressing an increasingly hard-to-please crowd.” (Finke 2009). Amid the market’s recession, job layoffs, bank bailouts, foreclosures, and identity theft issues, it is no wonder lenders are raising their standards on who to loan money to.
The concept of a financial report card has been around for several decades, however, it wasn’t until the early 1980s did an actual mathematical formula using computers come into play. An engineer named Bill Fair and a mathematician named Earl Isaac came to convince lenders that a mathematical formula would be more accurate at predicting whether a person would default on a loan better than the most experienced loan officer. Considered pioneers in their field, these two men partnered together and founded the firm Fair Isaac. Together these two men introduced lenders to the term FICO, which is a person’s credit score. From then on this three digit number would come to be the most widely used scoring system in determining if an individual would be low or high risk in borrowing money. Still used today, the FICO score has come to determine more than just a yes or no on loan approvals. Employers are now having job applicants sign waivers so that they may pull the applicants score to determine correlation between being financially responsible and a trusting worker. Landlords have reserved the right to pull a possible tenant’s score to determine risk of whether or not they’ll pay rent on time, or at all. Today FICO standards have changed in the eyes of a lender. What used to be a good score is now not good enough. This has much to do with our economic recession and current bank bailouts. Credit is more scrutinized than ever and it is important to keep a healthy score to be approved for low rates or at all.
In the real world, the importance of having good credit cannot be emphasized enough. Nearly every lender relies on one’s FICO score in determining APR rates and amount that can be borrowed. As discussed earlier, in these days it is becoming more and more common for not just lenders, but employers and landlords are reserving the right to request for an individual’s score.
One’s FICO score can range from a very risky 300 to a perfect 850. It is compiled from the three individual scores consumer’s have with the credit bureaus, that being Experian, Equifax, and TransUnion. These are the credit bureaus lenders report to about an individual’s credit history and activity. Followed are the varying degrees of what one’s score means:
· Excellent Credit: 700- 850. Individuals in this credit range receive the best interest rates, are less likely to default, and should have no problems applying for credit.
· Good/Decent Credit: 600-699. Individuals in this credit range are likely to get approved for loans but not at necessarily top notch interest rates.
· Poor Credit: 500-599. Although not at the lowest of the credit totem pole, banks are likely to issue higher interest rates if credit gets approved.
· Dismal Credit: 499-below. Credit terms in this category are the most expensive if applicant gets approved for credit at all.
(Credit.com 2009).
With that charted a consumer’s credit can be dissected even more when broken down into five factors. The following describes a percentage total of the varying degrees of how one’s score is comprised:
· 35 percent = How timely one is on their payments
· 30 percent = Debt to credit ratio
· 15 percent = Length of credit history
· 10 percent = Recently opened credit or applications for credit
· 10 percent = Type of credit mix
(Gutner 2005).
With the recent market collapse, creditors are feeling the crunch and naturally the burden falls down hill to their borrowers. Financial analyst Meredith Whitney reported on the troubles of Citigroup stating that financial institutions could cut up to $2.7 trillion in credit lines that were once available to consumers. (marketfolly.com 2009). This puts a damper on consumer spending and people who often rely on credit cards to finance their day to day spending.
In as early as the beginning of 2007, consumers were already feeling the credit crunch due to the nearing recession. According to Gallup Polls, over the past couple years the general perception has been that consumers remain resilient and have continued to spend despite gas prices surging and consumer confidence wavering. What the polls revealed is that many lower and middle-income consumers were already feeling a credit crunch as their access to credit has been reduced; just as Meredith Whitney predicted. The study suggests that more and more consumers are likely to know someone close to them who has recently been denied credit or experienced bankruptcy or foreclosure. According to Gallup polls, in as early as 2007 consumers were already saying that now is a bad time to borrow. The general perception of consumer resiliency is set off-balance because of middle and upper-income consumers who have been doing quite well and have continued to borrow and spend.
In today’s financial times it is relevant now more than ever for consumers to nurse their credit scores to keep them at a healthy range if planning on borrowing in the future. First off is to know the score. For $16 dollars individuals can log on to myfico.com to obtain a representative score. Secondly, experts advise to scour your credit report for mistakes. According to John Ulzheimer, president of consumer education at Credit.com, correcting a mistake can raise a score as much as 200 points. (Finke 2009). Following the directions at any of the three credit bureaus website can help to repair any mistakes. Thirdly, borrowers need to pay on time. A bulk of our credit anatomy comes from making timely payments.
As the American economy is on the mend, the financial expectations of lenders aren’t projected to change for the better any time soon. Consumers need to bear in mind that credit scores are not solely used for the sake of being approved for a loan anymore; it is also a determining factor in finding a place to live or getting a new job. It is safe to say that repairing and maintaining a healthy credit score plays a large factor in American quality of life.
Sources:
Credit 101; The Building Blocks of Credit. 2009. Retrieved October 1, 2009, from credit.com. Website: http://www.credit.com/credit_information/credit101/
Downgrading the American Consumer’s Credit Rating. 2009. Retrieved on September 23, 2009, from marketfolly.com. Website: http://marketfolly.com/2009/03/downgrading-american-consumers-credit.html
Finke, Brian (2009, September). “Win at the Credit Scoring Game” CNN Money Magazine, p. 67-70
Gutner, T. (2005). Anatomy of a Credit Score. Business Week, 116-18. Retrieved September 21, 2009, from OnmiFile
Jacobe, Dennis (2007, September 17). “The Consumer Credit Crunch Is Already Underway; New early September poll show credit crunch impact varies by age, income, geography” Gallup Poll News Service
Jacobe, Dennis (2007, November 16). “Consumer Credit Perceptions Plunge; The Experian/Gallup Personal Credit Index (PCI) falls sharply in early November” Gallup Poll News Service
Trejos, Nancy (2009, June 21). “Credit Score Shell Game; As High Scores Vanish, Borrowers’ Luck Runs Out” The Washington Post
