Know Your Credit Scores
A long, long time ago (1956) in a land far, far away (California), two mathematicians got together to provide decision making solutions to a wide range of industries one being Credit Reporting. The two men were Bill Fair and Earl Isaac. Thus we have the company name FAIR ISAAC Co. or “FICO”. The company proclaims it pioneered credit scoring although it’s somewhat a mystery as to why it took over 35 years to convince the credit industry to use scoring. My guess is lawsuits. Lenders and credit reporting agencies were involved in a growing number of lawsuits alleging bias and discrimination in their credit granting process. Credit scoring was thought to provide an unbiased framework for decision making related to credit “risk”. Recent Federal legislation allows anyone to request and obtain at no cost a credit report from all three credit bureaus once a year. Please go to www.annualcreditreport.com for additional information and to request a credit report. Although you can obtain your reports for free, the credit bureaus may still charge you for providing a credit score with each report.
How the FICO Score System Calculates Your Credit Score
The FICO Scoring Model is proprietary and not published but we do know that the model contains 33 variables that were found in combination to be predictive of an individual’s future ability to repay a loan. These variables are grouped into 5 categories:
- Payment History – accounts for approximately 35% of your score.
- Amounts Owed – accounts for approximately 30% of your score.
- Length of Credit History – accounts for approximately 15% of your score.
- New Credit – accounts for approximately 10% of your score.
- Types of Credit in Use – accounts for approximately 10% of your score.
What FICO Scoring Ignores
FICO Scoring ignores your race, color, religion, national origin, sex, and marital status.
In addition, it ignores:
Your salary, occupation, or employment history
Where you live
Certain types of credit inquiries (requests for your credit report):
The score does not count consumer disclosure inquiries (requests that you’ve made for
your credit report to check it).
It does not count promotional inquiries (requests by lenders in order to make you a pre-
approved credit offer) or administrative inquiries made by lenders to review your account
Hard vs Soft Inquiry
Only inquiries promptd by your own actions for credit count towards your FICO Score – Hard Inquiry
The FICO Scoring Model ignores all mortgage and car loan inquiries made in the 30 days prior to scoring. The FICO Model will count inquiries for mortgage or auto loans older than 30 days as one inquiry only even if there had been several inquiries for a mortgage or car loan.
How to Interpret Your Credit Report and Scores
Since credit scoring is here to stay, it’s important for you to know the information contained in your credit report and how it affects you when applying for a mortgage. The Covenant Team of Service First Mortgage would love to assist you in this process. www.thecovenantteam.com or call (972) 396-9143.
When applying for a mortgage, there are three credit scores for each borrower on the loan application. The lender obtains FICO Scores on each individual from three major credit bureaus, Equifax, Trans Union, and Experian. Each bureau has your credit score and all label it with a different name, Beacon, Empirica, or Fair Isaac. Although the score names are different, they each use the FICO Scoring model. You will notice that the three scores are different between bureaus. Creditors do not report to each bureau and items of public record such as bankruptcies and judgments are not picked up by each bureau. As a practical matter, the lender normally uses the middle score in it’s evaluation of your risk profile (probability you will repay the loan). What is the minimum and maximum score? As an example, Experian’s scores range from 350 to 900. Can an individual receive a zero or no score? Yes, occasionally a credit report is issued with no score when there is insufficient data to review.
Accompanying every credit score are four “reason codes”. These codes identify some of the 33 variables that had the most influence in lowering your credit scores. Examples of the 10 most common reason codes are:
1) Serious delinquency
2) Serious delinquency and public record or collection filed
3) Derogatory public record or collection filed
4) Time since delinquency is too recent or unknown
5) Level of delinquency on accounts
6) Number of accounts with delinquencies
7) Amount owed on accounts
8) Proportion of balances to credit limits on revolving accounts too high
9) Length of time accounts have been established
10) Too many account with balances
How Long Does Your Credit History Remain on Your Report
The length of time information remains on your credit file is shown below:
Credit Accounts –
Accounts paid as agreed remain for up to 10 years*
Accounts not paid as agreed remain for 7 years*
Collection Accounts remain for 7 years*
* These time periods are measured from the field on your credit report titled “Date of Last
Activity” for each credit account. (The question remains as to what constitutes the
last activity date on the account.)
Courthouse Records (Public Records section of your report)
Bankruptcy – Chapter 7 & 11 remain for 10 years from the date filed.
Bankruptcy – Chapter 13 non-dismissed or non-discharged remains 7 years from date
Unpaid Tax Liens remain indefinitely.
Paid Tax Liens remain for up to 7 years from date released.
Paid or Unpaid Judgments remain on file for 7 years from date filed.
(New York State Residents Only: Satisfied judgments remain 5 years from the date filed, paid collections remain 5 years from date of last activity. California State Residents Only: All tax liens remain 7 years from date filed.)
How Do People Score Based On General Population
620 – 690
745 – 780
Credit Scores and Terms of Your Loan
Remember your credit scores are a measure of risk, the risk of your loan going into default. As the level of risk increases, a lender requires greater compensation (higher rate) to assume the risk of default. It can also affect the level of down payment (higher for higher risk) and term of the loan (shorter term for higher risk). This all means money from your income and asset resources. Why wait? Investigate now and start raising your credit scores. It makes sense to periodically obtain a copy of your credit report to review payment records and scan for errors with each reporting agency. Take action! Don’t forget that improving your credit score is a time related process but, to borrow a phrase, it “Really Will Save You Money”.
Actions to Improve Your Credit Score
- Research your credit by obtaining a copy of your report annually
- Get a major credit card. Retail and gas cards will help build credit scores but they do not have the same impact as a major card from Mastercard, Visa, or American Express. If you don’t qualify for a regular card, consider a secured card.
- If you don’t trust yourself to remember your payment date, set them up on automatic payments from your bank
- Don’t let disputes go to a collection status
- Spread your debt out. The FICO formula likes to see large gaps between your actual balance and your credit card limits. It’s better to pay down charge debt than installment debt.
- Credit utilization should be at 30% or less. Keeping your charge balances at 10% of the maximum allowed is even better.
- Move debt to an installment loan where possible.
Don’t close accounts or let them be closed. Closing accounts with zero balances can’t help your scores and it may actually hurt.
The Covenant Team of Service First Mortgage would love to assist you in reviewing your credit report in preparation of a new home purchase or refinance. Please call us today at (972) 396-9143