Is Sub-Prime a Fad or Real Profit Center?
By Paul Snider
Because of the response to my last article on credit scoring, and in light of new events that have taken place, I decided to write a follow-up.
Consumers will now be armed with additional information, which will allow better decisions when accepting terms of loans for automobile and mortgage purchases. Below is an excerpt from a recent article published on credit scoring.
WASHINGTON The Goliath gatekeeper of credit scores has just yelled uncle. Next month Fair, Isaac, the creator of FICO scores used by numerous lenders, plans to provide consumers with the three-digit grade that plays a giant part in determining who receives loans and how much they pay.
What a difference a few months make. In March the San Rafael, Calif.-based company was steadfast against the disclosure of credit scores, a mathematical computation that tells lenders how likely a consumer is to repay a loan or make a payment on time.
Now consumers can not only find out their score, which in the past was not available, they can also log on at www.fairisaac.com and learn what determines a high or low score by reviewing the factors that make up credit scoring. Armed with this new and powerful information, consumers will be in a better position to enhance their personal credit scores and in many cases save money because they will be able to negotiate lower interest rates.
To professional automobile finance managers this is very important because during the credit interview you can explain how the score is developed, factors that will affect the score and why rates are set based on the credit quality of each consumer. By doing this you enhance consumer loyalty in addition to helping credit-challenged consumers take action to clean up past problems plus drive home the car of their dreams.
The major factors affecting credit scores are:
- 1. Payment History 35% of the total score
- 2. Amounts Owed 30% of the total score
- 3. How Established is Credit 15% of the total score
- 4. New Credit 10% of the total score
- 5. Types of Credit 10% of the total score
A score takes into consideration all these categories of information, not just one or two. No one piece of information will determine a score. FICO scores do not take into consideration income or type of credit a person is applying for. Scores consider both positive and negative information and does not consider race, gender, religion or nationality. The score itself represents how likely an individual is to repay a loan or make credit payments on time by using a mathematical equation that evaluates information from a credit report and comparing it to the patterns of thousands of past credit reports. In many cases good credit can be adversely affected by the frequency of late payments or applications made for new credit.
I hope this information has been helpful and will serve as another tool for finance professionals to use in helping consumers obtain credit for automobile purchases.
Paul Snider is president/CEO of CreditIQ.com Inc./VOISYS Systems Corporation of Clearwater, Fla., specializing in lead-generating services including 800 loan-by-phone and Internet applications. psnider@dealeronline.com
