BUYING MENU Buying Home Process Qualifying Credit Responsibilities FAQ/Tips

CREDIT SCORES BACKGROUND

Credit Bureau scores are often called “FICO scores” because most credit bureau scores used in the United States are produced from software developed by Fair Issac and Company (FICO). FICO scores are provided to lenders by the three major credit reporting agencies: Equifax, Experian, and TransUnion. Credit scores provide the best guide to future risk based solely on credit report data. The higher the score, the lower the indicated risk. But no score says whether a specific individual will be a “good” or “bad” customer.

While many lenders use credit scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no single “cutoff score” used by all lenders and there are many additional factors that lenders use to determine your actual interest rate.

Credit scoring is calculated by a mathematical equation that evaluates many types of information that are in a consumer’s credit file at that specific repository/bureau. By comparing this information to the patterns in hundreds of thousands of past credit reports, the score identifies the lender’s level of future credit risk. In order for a credit score to be calculated on a consumer’s credit file, the file must contain at least one account, which has been open for six months or longer. In addition, the file must contain at least one account that has been updated in the past six months. This ensures that there is enough information and enough recent information in the credit file on which to base a score.

WHAT’S CONSIDERED IN A CREDIT SCORE:

 There are five main categories of information that credit scores evaluate.

These are:

• 1. Payment history (35% of the score’s weight)
  
  

a. Payment Information on many types of accounts. These will include credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans.
b. Public record and collection items (reports of events such as a bankruptcy, foreclosures, suits, wage attachment, liens, and judgments).
c. Details on late or missed payments (delinquencies) and public record and collections items (specifically, how late they were, how much was owed, how recently they occurred and how many there are).

 

Payment History Tips:


•Pay bills on time. Delinquent payments and collections can have a major negative impact on the score.

•If the consumer has missed payments, he/she must get current and stay current.

•Be aware that paying off a collection account will not remove it from the credit report. It will stay on the report for seven years. Also, paying off an old collection account may temporarily lower your credit score.
•If a consumer is having trouble making ends meet, he/she should contact their creditors or see a legitimate credit counselor. This wont improve their score immediately, but if he/she can begin to manage their credit and pay on time their score will get better over time.



• 2. Amounts Owed (30% of the score’s weight)

  a. The amount owed on all accounts.

  b. The amount owed on all accounts and on different types of accounts. In addition to the overall amount the consumer owes, the score considers the amount he/she may owe on specific types of accounts, such as credit cards and installment loans.

  c. Whether the consumer is showing a balance on certain types of accounts.

  d. How many accounts have balances. A large number can indicate higher risk of over-extension.

  e. How much of the total credit line is being used on credit cards and other revolving credit accounts.

  f. How much of installment loan accounts is still owed, compared with the original loan amounts.

 

Amounts Owed Tips:

• •Keep balances low on credit cards and other revolving credit. High outstanding debt can negatively affect a score. Maintain balances owed to at or below 30% of the available credit limit.

• •Pay off debt rather than moving it around. The most effective way to improve the score in this area is by paying down the revolving credit. In fact, owing the same amount but consolidating the amount onto fewer open accounts may lower the score.
• •Don’t advise a consumer to close unused credit cards as a short-term strategy to raise the consumer’s score.
• •Don’t open a number of new credit cards that the consumer doesn’t need just to increase his/her available credit. This approach could backfire and actually lower the score.
• 3. Length of Credit History (15% of the score’s weight)
  
  

a. How long the credit accounts have been established, in general. The score considers both the age of the oldest account and an average age of all the accounts.

b. How long specific credit accounts have been established.

c. How long it has been since the consumer used certain accounts.

 

 

Length of Credit History Tip:



• If the consumer has been managing credit for a short time, he/she shouldn’t open a lot of new accounts too rapidly. New accounts will lower the average account age, which will have a larger effect on the score if the consumer doesn’t have a lot of other credit information. Also, rapid account buildup can look risky if the consumer is a new credit user.



4. New Credit Inquiries (10% of the score’s weight)



a. How many new accounts a consumer has. The score looks a how many new accounts there are by a account. It also may look at how many of the accounts are new accounts.
b. How long it has been since the consumer opened a new account. Again, the score looks at this by type of account.
c. How many recent requests for credit has the consumer made, as indicated by inquiries to the credit reporting agencies. Inquiries remain on the credit report for two years, although credit scores on ly consider inquiries from the last 12 months.
d. Length of time since credit report inquiries were made by lenders.
e. Whether the consumer has a good recent credit history, following past payment problems. Re-establishing credit and making payments on time after a period of late payment behavior will help raise a score over time.

 

New Credit Inquiries Tips:



• Advise consumers to do any rate shopping for a given loan within a focused period of time. Credit scores distinguish between a search for a single loan and a serch for many new credit lines, in part by the length of time over which inquiries occur.
• Re-establish credit history if there have been problems. Opening new accounts responsibly and paying them off on time will raise the score in the long term.
• Recognize that it’s ok for a consumer to request and check his/her own credit report. This won’t affect the score, as long as the consumer orders his/her credit report directly from the credit report agency or through an organization authorized to provide credit reports to consumers.

 

5. Types of Credit Used (10% of the score’s weight)



a. The score will consider the mix of credit cards, retail accounts, installment loans, and finance company accounts and mortgage loans. It is not necessary to have one of each, and it is not a good idea to open credit accounts not intended to be used. The credit mix usually won’t be a key factor in determining the score, but it will be more important if the credit report does not have a lot of other information on which to base a score.
b. This score takes into account what kinds of credit accounts the consumer has, and how many of each. The score also looks at the total number of accounts the consumer has.

 

Types of Credit Used Tips:



• Advise consumers to apply for and open new credit accounts only as needed. Don’t open accounts just to have a better credit mix (it probably won’t raise the score).
• Have credit cards, but manage them responsibly. In general, having credit cards and installment loans (and paying timely payments) will raise the score. Someone with no credit cards, for example, tends to be a higher risk than someone who has managed credit cards responsibly.
• Recognize that closing an account doesn’t make it go away. A closed account will still show up on the credit report, and may be considered by the score.

 

WHAT’S NOT CONSIDERED IN A CREDIT SCORE



1. A consumer’s race, color, religion, national origin, sex and marital status. US law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.
2. A consumer’s age. Other types of scores may consider age, but FICO scores don’t. 3. A consumer’s salary, occupation, title, employer, date employed or employment history. Lenders may consider this information, however, as well as other types of scores.
4. Where a consumer lives.
5. Any interest rate being charged on a particular credit card or other account.
6. Any items reported as child/family support obligations or rental agreements.
7. Certain types of inquiries.
8. Any information not found on the consumer’s credit report.
9. Any information that is not proven to be predictive of future credit performance.
10. The score does not count “consumer-initiated” inquiries (requests the consumer has made for his/her credit report, in order to check it). It also does not count “promotional inquiries” (requests made by lenders in order to make a consumer a “pre-approved” credit offer), or “administrative inquiries” (requests made by lenders to review a consumer’s account with them). Requests that are marked as coming from employers are not counted either.

 

HOW TO CORRECT ERRORS IN A CONSUMER’S CREDIT FILE

 Changes to correct credit must be made at the repository in order for the information to affect the score. The consumer must write a letter of dispute regarding the erroneous information reported by a specific repository to the repository referencing the tradeline, account numbers, what is incorrect. Send the letter overnight mail, with a return receipt requested.

 

Under The Fair Credit Reporting Act effective October 1, 1997, a credit repository has 5 days from the receipt of a written investigation request to contact the appropriate credit grantor about investigating the complaint(s). The consumer should receive a reply back within 0 days of the original repository notification. Within 5 business days after the completion of the investigation, the repository must send a written report to the borrower with its findings (and a copy of the revised report if there was any change). The findings will state one of the following:




• There is an error and the credit report is corrected.
• There is no error, so the report stands.
• The credit grantor(s) did not respond in the allotted time, so the disputed item(s) is dropped from the report.

 

If credit errors are detected, below is the contact information for the three repositories:

 

Equifax Information Service

Attn: Disputes

P.O. Box 740256

Atlanta, GA 30339

(800) 270-3435

www.equifax.com

 

Experian

Attn: NCAC

P.O. Box 2106

Allen, TX 75002

(888) 567-8688

www.experian.com

 

TransUnion Corporation

Attn: Disputes

P.O. Box 390

Springfield, PA 19064-0390

(800) 888-4213

www.transunion.com

 

 

RAPID RESCORING OF A CREDIT FILE



The Bureau Direct method is a newly released process from each of the three repositories that allows mortgage brokers and lenders, with proof and the affiliated credit reporting company’s validation, to have significant errors found on a consumer’s credit report changed.

 

The change occurs typically within 1-5 business days at the repository level, after the lender’s credit report company receives the appropriate information. The lender will receive a confirmation that the necessary changes have been made and a new report rescoring the consumer’s credit information can be requested.

 

This service is provided by the affiliates of the repositories to try to enable a rapid rescoring of data for consumers applying for home loans. Your lender’s credit reporting company may or may not participate in this new process, if not, they wil have to find out how they may provide this service, for a fee, so that they might better assist your consumers with their loan process. If not, they will want to call other reporting companies in your area until they locate one who is participating. Generally, the reporting company will need to know what the error is, why it is an error, and proof of what the correction is that should be made.

 

The lender’s credit reporting company verifies the information then has their contact at the repository re-verify the information. The contact then physically changes the raw data at the repository via computer, installs a buffer against future tape update changes and confirms the change is in place. The lender can now run a new credit report and you will have new scores, assuming there are no other changes in data. When significant errors are removed scores have been increasing on an average of 50 points and in some cases over 100 points.

 

The cost runs anywhere from $75 to approximately $300, depending on how many errors need correcting and whether the report is joint or individual.


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