Good news for dealers looking to grow business by offering financing options to potential buyers – the average FICO credit score, a key component to financing decisions, is at an all-time high in the US.  Based on a recent FICO blog there has been significant improvement in FICO scores since the Great Recession.  The national average FICO score in April 2015 is at an all-time high of 695, up from a low of 686 in October 2009.   The data for those two time periods also indicates that 19.9% of the population has a credit score of 800 or higher, up from 18.2%.  Conversely, fewer consumers have credit scores below 600, 21.9% of consumers had scores of less than 600 compared to 25.1% in October 2009. According to the blog, more consumers financing their purchases are managing their loan payments responsibly and therefore not falling into the lower FICO range.

The significant improvement in customers’ credit since the depths of the Great Recession bodes well for dealers utilizing financing as it should result in improved approval rates compared to years past.  At Pinnacle Finance FICO scores are only one of several considerations in our loan approval process.  Other factors that weigh into our credit decision include home ownership, applicant(s) income, debt ratios, and any down payments.

FICO Score Primer – What do they mean and how are they derived?

The FICO score was first introduced in 1989, by FICO, then called Fair Isaac and Company.  The FICO model is used by the vast majority of banks/credit grantors and is based on data in consumer credit files of the three national credit bureaus: Experian, Equifax and TransUnion.  Because a consumer’s credit file may contain different information at each of the bureaus, FICO scores can vary depending on which bureau provides the information used to generate the score.

Credit scores are designed to measure the risk of default by taking into account various factors in a person’s financial history. Although the exact formulas for calculating credit scores are proprietary, FICO’s has released their weighting for various score components:

• 35% Payment History – This considers the presence of or lack of derogatory information.  Bankruptcy, liens, judgements, settlements, charge offs, repossessions, foreclosures and late payments can cause a FICO score to drop.
• 30% Amount Owed – Considers a number of debt specific measurements including the debt to limit ratio, number of accounts with balances, amount owed across different types of accounts and the amount paid down on installment loans.
• 15% Length of Credit History – As a credit history ages it can have a positive impact on the FICO score.  Two key metrics – average age of the accounts on a report and the age of the oldest account.
• 10% Type of Credit Used – There are three major types of credit accounts: installment, revolving, and mortgage.  Consumers can benefit by having a history of managing different types of credit.
• 10% Recent Searches – Hard credit inquiries (such as when consumers apply for a credit card or a loan) can hurt scores especially if done in great numbers.  Rate shopping for a mortgage or auto or student loan over a short period of time (14-45 days) will not likely decrease a FICO score.    Credit inquiries that were made by the consumer for personal use, by an employer (for employee verification), or by companies initiating pre-screened offers of credit or insurance do not have any impact on a credit score: these “soft inquiries” or “soft pulls”  do not appear on a credit report used by lenders, only on personal reports.  Soft inquiries are not considered by the credit scoring systems.

The importance of any one factor in a person’s credit score calculation depends on the overall information in their credit report.  For some people, one factor may have a larger impact than it would for someone with a much different credit history.  In addition, as the information in a person’s credit report changes, so does the importance of any factor in determining their FICO score.  Even the levels of importance shown in a FICO Score chart are for the general population, and will be different for different credit profiles.