Over the past year we've given much attention to the lack of common sense that continues to pervade the mortgage industry.  As part of the discussion we recently raised the question of whether or not the home loan underwriting process is too reliant on the FICO model.

READ MORE: Does the Mortgage Industry Rely Too Heavily on Credit Scoring Models?

However before posing that question we performed a fair amount of research on the FICO model and addressed the general confusion that surrounds the determination of a borrower's FICO score. Craig Watts, FICO's Public Affairs Director, told us that FICO's scoring models are not static.  "They are constantly evolving, but each change reflects data over time, and users do not adopt new models immediately because of the cost and labor involved."

Today Mark Greene, the CEO of FICO, addressed a few misconceptions about the model....

FICO Questions Answered: Fair, Isaac CEO Reveals 3 Key Ways to Improve Your Score

Many people have questions about the credit scores generated by Fair, Isaac & Co. Today on Tech Ticker, Aaron Task and I figured we'd take our questions straight to the source: Mark Greene, chief executive of Fair, Isaac & Co., creator and proprietor of the FICO score.

"The FICO score is a measure of a consumer's financial health and creditworthiness," Greene says. It's simply a number, ranging from 300 to 850 -- the higher the better. The average FICO score in the U.S. is about 700, and pretty much every bank in the country uses a FICO score when making lending decisions. But while the scores are important, they're not the be all and end all.

"Scores are meant to be one of several things bankers use in doing what we call sound underwriting," Greene says. Lenders should also be taking into account borrowers' background references, their capacity to repay loans, and collateral.

FICO creates the score simply by feeding numbers into its formula: "It's based on pure, statistical evidence, with no judgment or evaluation or emotion."

The main factors Fair, Isaac takes into consideration are:

• How much total indebtedness a consumer has
• How long they've had the debt. "Newer relationships are riskier than things you've been paying over a long period of time," Greene says.
• How much available credit is being used: "If you're close to the edge on your credit cards, that's a danger signal."
• The mix of an applicant's credit portfolio -- is it all credit cards (bad) or a mixture of credit cards, a mortgage, and a car loan (better)?

Greene outlines three key ways through which people can improve their scores. First, pay your bills on time. Second, don't get close to the edge: "Don't use more credit than you really need." And third, don't apply for new credit unless you absolutely have to.

It may sound obvious, but the easiest way to avoid a sharp downgrade in your FICO score is to stay current on your mortgage and stay solvent. "One thing people should know is that a foreclosed home or personal bankruptcy is the most severe harm that you can do to your credit score," Greene says. FICO scores can fall by as much as 150 points when borrowers walk away from mortgages or declare bankruptcy; it can take up to seven years to rehabilitate the rating.

Greene helps clear up what may be some misconceptions about the way credit scores are calculated. For example, is it true that every time you apply for a loan it hurts your score?

"It depends on the kind of product you're shopping for," says Greene. With car loans, for example, Fair, Isaac understands that people shop for rates. "If you apply for five different car loans within a couple of days, we understand that you're looking to buy one car at the best rate. And there's no adverse impact on your credit score."

On the other hand, when people apply for five different credit cards in the space of a week, they're usually seeking to open multiple accounts simultaneously. "In those situations we will take a few points off someone's FICO score because we're worried they're sending a signal that they need too much credit."

Is it also true that people who have little or no debt may find themselves with lower credit scores? That can be the case. "Warren Buffett used to say that he didn't have a particularly high credit score," says Greene.

Consumers can obtain their FICO score from the company at myFico.com. (Editor's note: Greene says the report is free in the accompanying video but you must register to receive your FICO score and a payment is required.)

Greene also points to a just-launched website, scoreinfo.org, that helps people understand how credit scores factor in this new era of financial regulation. As of January 2011, you have the right to receive your score any time a lender makes certain kinds of decisions -- e.g., if you're denied credit or given credit on less than the most favorable terms a lender offers.

In the U.S. economy today, people may frequently find that a credit score is being used by companies to make decisions that have nothing to do with credit. Credit scores have become part of the application process for jobs, car insurance, and health insurance. Greene notes that the credit score can be useful in non-lending contexts: "People who are good with their finances frequently turn out to be good drivers." But he reiterates that they were designed for a purely financial use.

Daniel Gross is economics editor and columnist at Yahoo! Finance.

HERE is the accompanying video.

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Also in the news from FICO...

FICO Launches ScoreInfo.org to Help U.S. Consumers Understand New Risk-Based Pricing Disclosures

MINNEAPOLIS—January 10, 2011—FICO (NYSE:FICO), the market leader and recognized standard in credit scoring, today launched ScoreInfo.org, a non-commercial educational website, to provide comprehensive information about the new Risk-Based Pricing Rule and other federally-mandated credit disclosure notices. ScoreInfo.org will help the millions of U.S. consumers who receive notices of credit approval or denial to understand these notices’ meaning as well as the rights and potential actions available to consumers. The site also explains the composition and role played by FICO® Scores, which are used by 90 percent of U.S. lenders; worldwide, over 10 billion FICO® Scores are consulted annually.

As of January 1, 2011, amendments to the Fair Credit Reporting Act require lenders to send a Risk-Based Pricing disclosure notice whenever a lending decision, based on a consumer’s credit score or credit report, results in less favorable credit terms, such as a higher interest rate or larger down payment requirement. This year, U.S. lenders are expected to process more than one billion credit applications, resulting in the delivery of approximately 500 million of these Risk-Based Pricing disclosure notices, in addition to the millions of notices consumers already receive when their credit application is denied.

“The new Risk-Based Pricing Rule is great for the consumer as it further increases the level of transparency in the lending process and, at the same time, can help improve the accuracy of the information in the consumer’s credit report,” said Jordan Graham, president of FICO Consumer Services. “Now, millions of U.S. consumers, whether they were approved or declined for credit, can at no charge see the credit report or FICO Score their lender used to make the lending decision.  FICO launched ScoreInfo.org to help consumers better understand their disclosure notices and how to use that new knowledge to their benefit.”