IF you recently heard what one of your scores is, forget about it – THEY CHANGE EVERY DAY – plus, we need all 3 of them!
Named for credit scoring – industry leader Fair, Isaac and Co., the FICO score is a very significant part of how most mortgage lenders and others assess your credit worthiness. The system uses your credit history (along with several hundred other items) and takes that history to measure it against a database of habits in the general borrowing population. This statistical analysis ultimately measures, with a high level of probability, the likelihood that you will repay your debt without loss to the lender/ investor. The Fair, Isaac system looks for patterns, and takes into account WHEN a problem(s) occurred, and whether it is part of an ongoing condition.
The three major credit repositories Experian, TransUnion, and Equifax have a score ranking level assigned to each customer in their credit files. This “score” is their version of who’s more, and who’s a less risky loan candidate. All three are different, different amounts, different numbers, and they are compiled from different ingredients. The “math” they use is their conclusion as to the “risk in advancing credit to a particular individual” — their opinions differ. These scores change in significant amount DAILY, and sometimes in a major way at month end as well. If you heard one of your three “numbers” (scores) from somebody last week, although it could still be “close” to that number now, actually it means NOTHING today to a new lender/loan agent/loan broker! Most lenders and loan brokers utilize the middle score out of the three (but many of the newer funding programs use the “primary repository” instead, while others use an “average”), for the primary income earner (the potential loan individual who earns the most money). – so there’s usually six (6) scores that need to be considered with each loan request! After more than 30 years of computerized study (visit the inventor of FICO scores and learn way more than you want to) and millions of borrowers tested and tracked, it has been scientifically shown that a medium score at 600, means the mortgage lender/investor will lose money on one out of every eight loans it makes. Only a handful of funding sources will touch scores much below 600 these days. A score of 700 for example, means the mortgage lender/investor will lose money on one out of every 1,293 loans it makes! SERIOUSLY, if YOU were a mortgage lender/investor and had the opportunity to make all that “interest” (or not), what score would you want from customers that YOU made loans to with your own money ??
There are four main categories of information that are available on a credit report.
- Identifying information includes your name and all aliases, current and past residential addresses, social security number, birth date, and current and past employment information. This information comes from any credit application that you have filled out and the accuracy of this information depends on the degree of accuracy with which you fill out credit applications.
- Credit information includes details about each trade line or account that you currently have open, when you opened them, the maximum credit limit, current balance, monthly payment and payment period, how many months the account has been reviewed, and whether the account is individual or joint. This information is available on all closed accounts as well.
- Public record information is provided from federal district bankruptcy records, state and county court records, and includes any data related to federal or state liens or judgments, and may include overdue child support payments as well.
- Number and type of inquiries can affect your score as well. An “inquiry” occurs each time a creditor or authorized user pulls your credit report. The date and name of the entity pulling the report will be listed on your report so that you know who has obtained a copy of it. Inquiry information can remain on your credit report for as long as two years. Your simple “shopping around” can hurt YOU!
Five key issues
When determining the score value, five (5) principal characteristics drive the ultimate number that your score achieves. So it’s NOT only how well you make your payments – in descending order, they are:
- Past delinquency. People who have failed to make payments in the past tend to do the same in the future.
- The way credit has been used. Someone “maxed-out” or close to the limit on a credit card, is considered a greater risk than someone who doesn’t look at the high credit line as a license to print money, and maybe spend it (like the old joke goes) “like a drunken-sailor”.
- The age of the credit file. Fair, Isaac’s model assumes people who have had credit for a long time are less risky.
- The number of times a person asks for credit. The systems frown upon those who have initiated several requests for credit cards, loans or other debt instruments over a short period of time. If you keep searching and searching for a loan, resulting is a lot of “inquiries” – that will hurt your overall credit score.
- A customer’s mix of credit. Someone with only a secured credit card is generally riskier than someone who has a combination of installment and revolving loans. (On installment loans, a person borrows money once and makes fixed payments until the balance is gone, while revolving borrowers make regular payments, each of which frees up more money to access.)
Defining a good score
Once all the data is gathered, the system generates a number roughly between 300 and 800. Anything higher than 660 is considered good. Falling between 620 and 660 begins to force lenders to look for other compensating factors to approve you for ‘preferred’ pricing. Below 620 you can still obtain financing, but you are certain to have more restrictive lending standards, such as requiring more money down if you’re buying a home, or paying a higher interest rate, or both. Only a handful of funding sources will touch scores much below 600 these days. There are always exceptions to the rule, however.
How scores are used
Residential real estate mortgage lenders use credit scores in addition to other risk assessment factors, amount of equity cushion available, and the borrower’s job/income stability. Other factors will also be weighed, such as debt load and any other factor that could impact a borrower’s ability to repay the debt. As credit scores go higher, these other factors diminish, but conversely, as your score dips into the low 600’s or further, these other factors become major aspects of whether or not you ultimately are approved for funding.
The true value of credit scores
Credit scores are not a perfect science, but in many ways they have leveled the playing field for consumers and lenders alike. Using credit scores has eliminated much of the subjectivity in risk evaluation and underwriting. Nobody wants to think that they got turned down for a loan because an underwriter just didn’t “like” the file, and with credit scores this subjectivity is dramatically reduced. If a 680 or better means you are automatically approved as long as the other factors such as income and assets needed to close are met, it creates a very objective arena in which consumers can expect fast, efficient, and ultimately more affordable loan products. Scores effects rates DRAMATICALLY.
What if I don’t qualify?
If you are denied for credit, you should obtain a copy of your credit report to ensure that the information is accurate before you seek alternative lending sources. Under the Fair Credit Reporting Act, you may not be charged for a copy of your credit report if you request it in writing within 30 days after being rejected for a loan. You can obtain a copy of your credit report only from the credit repositories that supplied your report to the creditor. You can contact the three credit repositories (bureaus) at the following addresses and phone numbers.
P.O. Box 740241 Atlanta, GA 30374-0241
P.O. Box 2104
Allen, TX 75013-0949
Trans Union Corp.
Upon reviewing your credit reports, if you feel that there is an error, you can contact the reporting company (the creditor) directly and ask them to send written letters to each of the three credit bureaus asking them to correct the error. You can also write a letter to each of the credit bureaus with detailed explanations of the errors and ask them to investigate the claims in question. Be sure to include your full name (including suffix), residence address, your social security number, date of birth, and your day time telephone number. Review of the claims is tedious and often time-consuming, but you should eventually receive written notice of the outcome of each investigated claim from each bureau; however, it is a good idea to follow up with each bureau after a few weeks of submitting your letters. The entire process should take less than 60 days from start to finish.
If you disagree with the outcome of the bureaus’ investigations, you can have the credit bureaus insert a testament from you, explaining why you feel there is an error on your credit report. This statement will appear on your credit report each time it is pulled in the future, and is free of charge. You can find out more information about your rights by reading the Fair Credit Reporting Act (http://www.ftc.gov/os/statutes/fcra.htm)
If the negative information on your credit report is accurate, there are several things you can do to improve your credit score.
First, find out why you were rejected and work toward a remedy.
If you lack credit history, open additional trade lines. It is usually easier to get approved for a gas card or department store card. Be sure to charge small amounts and then pay off the balance each month.
If you do not qualify for an unsecured credit card, apply for a secured card that requires you to deposit money in advance. In the event that you do not make your payments, the credit card issuer will keep the deposit. As is to be expected, the interest rate on these cards will be higher. Try to keep a small balance on this card each month and be sure to pay it off at the end of the month.
Pay down high balances. There is a higher risk associated with credit profiles that reflect balances near the credit limit. Try not to “max out” your credit cards. Maintaining approximately 1/3 balances vs. your actual limit on the card is best.
Close inactive accounts. If you have many accounts that you do not use, creditors will worry about the potential for you to charge your cards and get yourself into deeper debt. Try to keep open three to five of your lowest rate credit cards and close the rest that you do not use.
Make your payments on time so as not to accrue unnecessary interest and late charges. If you cannot make your payment on time, seek the advice of a professional debt counselor such as Consumer Credit Counseling Services. They can be reached at 800-577-CCCS or www.cccsintl.org/