Credit Scoring
Credit Scoring
Your credit report is an electronic record of your credit activities. These activities range from borrowing to buy a car or a home to applying for a loan or credit card. That's right -- every time you apply for a credit card or other loan, it registers as an inquiry on your credit report.
More importantly, a credit report is a record of how you use credit and how much of it you have available. If you're late in making a monthly payment, that too shows up on your credit report.
Whether a lender is evaluating your loan request or a card company is considering whether to give you a credit card, you can count on an evaluation of your credit report to influence its decision.
Unfortunately, some of us mismanage credit and pay the price: Information remains on a credit report for years and may hurt the chance of getting additional credit. Sometimes, credit reports omit steps that borrowers have taken to improve their credit, or contain errors.
In this article, this is how to manage your credit -- how to apply for it, how to use it wisely and how to monitor your credit report for accuracy. I will help you to understand your credit rights and how to repair your credit.
There is no magic to improving an applicant’s credit score. Credit scores automatically improve as an applicant’s overall credit picture gets better. Obviously this is not a fast fix; however there are a few things to remember. An applicant needs to pay down revolving credit card debt to below 30% of the available balance. Don’t close accounts unless the reason code indicates that there are too many revolving accounts and all of their accounts have little or no balances, don’t consolidate debt onto one or two cards and close the other cards. This may artificially skew the appearance of your credit utilization. Review the credit information in your credit file with each repository for accuracy, whether good or bad. Entries that have “maxed out” even with no derogatoriness are bad. Don’t go to Consumer Credit Counseling, as they are paid by collectors for the trade lines, not you! TROPICAL FUNDING provides this service free of charge as a benefit to the community. If there are significant errors on your credit report that can be documented, prove it to your mortgage company, so the score can be ignored and the credit package underwritten conventionally per FNMA and FHLMC’s underwriting criteria. If your mortgage company is unwilling to do that, find another mortgage company or go to Tropical Funding.
If there are any errors, write the repository reporting the misinformation. Send a letter regarding the dispute (with all available documentation attached) in overnight main with return receipt requested.
The Fair Credit Reporting Act gives the repository five days to notify the trade line of a dispute and request an investigation. Within 30 days, the trade line must report back to the repository regarding whether the disputed entry should be modified, deleted or remain unchanged. If there is no response regarding the dispute, the repository must remove the item from your file, but if 10 days later the trade line reports back that the entry is correct, it will be added back into the applicant’s credit file. If there is any change to your file, the repository must notify the consumer within 5 days of the change.
After receiving notification of a modification to an applicant’s file, your mortgage company may run a new report (not a reissue) and receive a new score. Make sure that if there are corrections made in the case of a bankruptcy or collection account, any charge off date or clearance date is the actual date of discharge and NOT the current date.
To contact the various bureaus and get immediate assistance, call:
Equifax Information Service Atten: Disputes 800/685-1111
Experian Atten: NCAC
Transunion Corporation Atten: Disputes 800/888-4213
Keep pressing “0” when you get into the voice-mail system until you get a live service rep. Tell that individual that you are applying for a mortgage loan and that you have to get the problem solved immediately to complete the process. The cost for each report from a bureau will be approximately $8.00, or free if ordered within 60 days if your application is declined for credit reasons (the report will not show a credit score).
Remember, judgments, collection accounts and charge-offs will stay on a credit report for seven years AFTER being paid current. They won’t fall off the report if the derogatories is ignored for seven years, and they can’t be corrected just because you pay the issue off, as it was still late. The only way to eliminate the impact of an error on a score is to have the error removed at the repository level. Until the issue is resolved at the repository, the applicant’s score will be negatively impacted. Information in credit files change daily. Don’t assume a report is wrong just because the subsequent score for you comes in lower than expected.
Consumers must pay their accounts on time, use credit conservatively (keep balances below 30% of available credit), apply for new credit very sparingly, and refrain from “credit surfing.”
With no recent “lates,” no additional increases to account balances or brand new accounts opened, your score should go up.
What is Credit Scoring?
Credit scoring is a quick, accurate and consistent scientific method of assessing credit risk. The scores are based on date about an applicant’s credit history and payment patterns stored in a credit bureau’s file on that applicant when a credit report is requested. Credit scores are calculated by statistical models that assign points to factors indicative of repayment. These models are imbedded in software that resides in credit bureaus or lender databases. A score is based on data rather than human assessment and judgment. This is what makes credit scoring an objective risk assessment tool, as opposed to a subjective one (e.g., the underwriter’s opinion).
Until the utilization of credit scoring in lending, an underwriter’s subjective interpretation of information was the only form of risk evaluation available to the real estate finance industry. Since no one has a crystal ball, underwriters obtained application information and credit reports on applicants to try to get an idea of the likelihood of repayment. However, even the best underwriter cannot match the scoring model’s statistical ability to weigh and measure hundreds of factors and to come up with a number indicating relative risk in a matter of seconds. The resulting score is a “snapshot”. It sums up what the applicant’s past payment performance and current usage say about the perspective applicant’s level of credit risk. Because the score is a composite of the entire applicant’s credit information, no single factor- like a bankruptcy or late payment- will be the sole cause of an unacceptable score.
How Is Scoring Models Developed?
Large amounts of credit data was analyzed to find out which variables correlate most reliable with subsequent credit related performance. To develop scoring models, analysts collect two categories of data:
First is the application and credit bureau information about the applicant at the time he or she applied for credit. The second category consists of actual subsequent performance records of the same individuals. Predictive factors are identified and weights are assigned to each. The result of the date analysis is a “scoring model”. Models are constantly reanalyzed and modified as social and economic factors change.
What Odds Are Indicated By The Scores?
When an applicant’s information is run through the computerized scoring model at the credit bureau, a number or score is returned. A score may range from 300-900, each score along the range is indicative of different set of odds for satisfactory repayment of the credit obligation.
Odds Good Payers to Bad Payer
Below 600 0008 to 01
620-659 0026 to 01
660-679 0038 to 01
680-699 0055 to 01
700-719 0123 to 01
720-759 0323 to 01
Above 800 1292 to 01
What Data Does A Credit Bureau Scoring Model Analyze? Scoring models DO NOT consider: race, gender, religion, marital status, income,
Nationality, address, employment, position or title, length of employment, sexual preference, or interest rate being charged on a particular credit card.
Scoring models DO analyze: all the credit information stored in the bureau’s credit file on an applicant at the time of the request.
1-Past Payment Performance (35% of the score’s weight)
a) The fewer lates, judgments, liens or collections the better. Zero “derogs” usually indicate lower risk.
b) Recent lates are more indicative of future default than those that occurred more than 24 months ago. A 30-day late today will have greater negative impact on the score than a bankruptcy 5 years ago with clean credit since.
2-Credit Utilization (30% of the scores weight)
a) Low Balances on several cards is better than high balances on a few cards. Balances should be kept at 30% or less of the potential availability.
b) Too many credit cards can be detrimental, but unless the first or second reason code states too many credit cards, DO NOT CLOSE ACCOUNTS UNTIL YOU HAS SOMEONE TO ANALYZED YOUR ENTIRE CREDIT PROFILE.
3-Credit History (15% of the Credit Score Weight)
a) The longer accounts have been opened, the lower the risk indication.
b) Opening new accounts and closing seasoned accounts will negatively impact your score- people should avoid “credit surfing”.
c) Established credit history is relative to past payment performance and to what percentage of available credit is being used.
d) A brief credit history does not automatically indicate a higher credit risk, as people with limited credit history can score high as long as they are not heavy users of credit and their payments have been paid on time. Generally automated underwriting systems look for at least two accounts in good standing to have been open for at least six months.
4-Types of Credit In Use (10% of credit scoring weight)
a) Finance company lines will score lower than bank lines and department store lines.
b) 90 days or six months same as cash, deferred payments, and lines are generally extended by finance companies.
5-Inquiries-New Applications for Credit (10% of the credit scoring weight)
a) Looking for new credit can mean higher risk if several credit cards are applied for in a short period of time and/or other existing accounts that are “maxed out.”
b) Multiple inquiries, regardless of the number, for mortgages or autos within a 14-day period of time are only counted as one inquiry.
c) Any mortgage or auto inquiry made about an applicant’s credit file within 30 days of the lender’s inquiry will be shown on the credit report, but will not adversely impact the applicant’s credit score.
d) Promotional or employer inquires do not adversely impact an applicant’s score.
e) Only inquiries authorized by the applicant for the granting of credit can impact an applicant’s score.
Credit information about past payment performance, credit utilization and credit history carries the most weight in a credit score. Credit scores automatically improve as a consumer’s overall credit picture gets better.
How Does Credit Scoring Help Lenders? Credit scoring allows lenders to base decisions on relevant credit performance data.
a) To give objective consistent assessments so the applicant is offered the loan product (s) he or she is most likely to be qualified for.
b) Credit scoring’s objective criteria and ease of automation help lenders remove the potential for bias and comply with fair lending laws.
c) As competition for profitability increased today, applicants with lower indicated degrees of credit risk can be offered more favorable terms in order to capture a larger market share.
d) Scoring gives lenders a reliable method of controlling delinquencies and charge-offs.
e) Scoring speeds up the decision-making process and allows more time for a lender’s underwriter to focus on the complex credit decisions.
f) Lenders typically loosen certain underwriting criteria and accept more loan applications without taking on a larger pool of poor performing loans.
How Credit Scoring Helps Consumers: Credit Scoring is not a crystal ball, but it helps lenders make more informed decisions and offers real benefits to consumers.
1- Credit scoring evaluates all applicants by the same criteria. Opinions do not enter the scoring equation. Empirically derived facts replace myths and personal prejudices about what constitutes a good future customer.
2- Changes in a consumer’s credit performance will change a credit score. The key is that as individual credit patterns change, scores are likely to change. While the “scoring scale” remains constant, a consumer’s place on that scale may change.
3- Scoring speeds up credit decisions. Scores help lenders make decisions more rapidly and offer with less documentation.
4- Scoring helps make more credit available. By helping lenders control losses and costs, scoring helps make more capital available to consumers. Historically, the less information lenders have available to distinguish between credit risks, the more conservative their lending policies tend to be. That means less credit is available to all consumers, low risk as well as high risk, and that the cost of that credit is more expensive.
Credit scoring gives lenders an important piece of information that allows lenders to lend to MORE consumers.
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