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What is Credit Scoring?
A national company, Fair Issac, is a statistical company that performs
statistical analysis on large amounts of payment information provided by the
three national credit bureaus (TRW, Equifax, Fair Issac). They use many
influencing factors to calculate the credit score, which are discussed more
fully below. The most competitive lenders use these scores to then decide
upon your rate and terms. Recently, it has been found that insurance
companies are now using the credit scoring to price insurance premiums. The
bottom line - the better your credit score, the better your pricing will be.
Using credit scoring seems is becoming more commonplace in the business
world to assess risk of repayment or claims.
What are Good Credit Scores?
Keep in mind that the approval process can be somewhat subjective, and
actually has human interpretation by underwriters that use national
guidelines for decisions to make the loan. Generally speaking, we have
experienced good credit approval results for the better interest rates for
credit scores over 625. For credit scores between 585 and 625, the
underwriters review process has been mixed, with scores approaching 585
being more difficult. Many times credit issues resulting from medical
incidents or trauma provide for exceptions in some cases. Dropping
below 585 will generally speaking either make it difficult to get credit
approval for the better interest rates, and although some companies will
loan with credit scores in the lower ranges, the rates and fees can be
misleading and excessive. Many times, borrowers in this situation may
consider using the fees to pay off existing debts or credit cards and
waiting a year or more to improve the credit score to qualify for a lower
rate with lower fees.
How are the Scores Calculated?
Fair Issac keeps the formulas very secret and nobody knows exactly how
the scores are calculated. We do know what influences the scoring. Under
each factor discussed below, we'll share some tips to help you improve your
credit score.
How Can Credit Issues Be Resolved?
Fixing your serious credit problems can take years. Simple oversights,
duplications or incorrect entries can be modified in 60 to 90 days, and
generally improve your score. It does take time to contact the lender and
document the problem and then to have the national computers updated. Many
companies only update to the credit bureaus monthly. The national credit
agency we use will update and denote your current credit report with
appropriate documentation for immediate use in your lending needs. They
can't change your credit score however. This is what takes the time to
accomplish. Start early and check your credit report annually.
Common Simple Credit Issues Nobody Realizes?
Most everyone that pays their bills regularly thinks they have "good
credit". "They offer me credit cards and accounts all the time, of course I
have good credit." If you haven't checked your credit report recently, you
might be surprised what you'll find. Here are some things that have happened
to some of our borrowers recently:
1) A lender was checking on credit for the borrower's potential car loan,
and tabbed through his computer accounts and selected the first "John Doe"
of two on the screen, without checking the social security number. He
attached the credit of the wrong "John Doe" to the borrower's credit report.
The credit score was really hit hard, because the wrong "John Doe" had
defaulted on his car loan and had a bankruptcy. The borrower had no idea
about the problem that had been there for several years! It was cleared up
in less than 30 days.
2) One borrower carried a high balance on a card used for his personal
business to accumulate travel miles, and had a large balance at the time the
credit report was pulled. Amazingly, that card showed up as two different
accounts. Apparently, the card company had a problem with its computers, and
on one of the reportings, the last four digits were left off the card
account number. The computer read them as two different accounts with
identical payment, balance and other information. Due to the nature of the
balance, this no doubt impacted the credit score of the borrower. This
problem was fixed in less than two weeks, but took months for the credit
score to adjust.
3) Mortgage companies sell their mortgages regularly to another company.
Many times the dates over lap because the old company didn't report the loan
sold or the new company start date overlapped the old entry.
4) One borrower was shocked to find out that his wife had opened up numerous
accounts at department stores to get 10% discounts on large purchases under
her name only, and she had missed a few payments. Her score was hit hard,
and while his wasn't, the lowest score of the couple is the one reviewed!
This one will take time to correct, but the extra cards were cancelled.
How Much Does Your Credit Report Cost and How Is
It Ordered?
Our national buying power gets a great rate and we pass it along to you. For
$20 we get a merged national credit report that takes the latest information
from the three national bureaus and generates your credit score. It takes
about five minutes. All we need is your written credit authorization, full
names and social security numbers. If you find some issues to be resolved,
you be happy to know that our report also includes a list of all the lenders
on your report and their phone numbers and addresses, making it easy for you
to contact them!
Influencing Factors in Credit Reports
Payment History
Most people feel that they have good credit if they have made prompt and
full payment of scheduled payments. Indeed, this is an important factor, but
a good payment history seems to only make up a small portion of the score.
However, slow payments, no payments, bankruptcies and judgments greatly
influence the credit score and are weighted heavily when occurring. It can
take years to fix a bad payment history. Bankruptcies and judgments can
sometimes be related to special circumstances and might be satisfactorily
explained when applying for financing. Chronic slow payments seem to mend
only with substantial periods of good payment history.
Some people attempt to pay down their debts to improve their credit
situation, which is appropriate, but may not improve the credit score much.
It is most important to pay on all your debts on time and for the correct
amount. Don't try to payoff one, while letting others ride. This creates a
bad payment history. Consolidating all your debt in one place at a low rate,
will help your overall picture the most.
Available Credit
As mentioned earlier, the credit score is a measure of the probability that
you will repay your debts. If you regularly pay your monthly debt payments
or pay off all your charges each month, you'd think that was good enough.
The lender reviews the ability for you to easily get more credit. This
"available credit" takes the form of all the credit cards you own and what
their limits may be. If you collect credit cards or revolving accounts like
from department stores, the scoring adds up all your available credit. If
you have ten cards with $4,000 limit on each, and a outstanding balance of
$2,000, then the scoring views you to be able to get $38,000 tomorrow by
charging on your accounts or cards. The more cards you have the more the
scoring is impacted. Ideally, no more that 3 credit cards or revolving
accounts should be maintained in order not to significantly impact your
credit score. It may be wise for you to cancel the cards you rarely if ever
use.
Credit Inquiries
Have you ever been to try out a new car or check out a new refrigerator and
ask for some payment information? Each time these companies check your
credit an inquiry is logged. The more inquiries you have, the more it
adversely impacts the credit score. The scoring views the repeated attempts
as your willingness to look for credit and assumes you'll be incurring more
debt in the near future, thus increasing the probability that you may have
more difficulty repaying.
It may be wise for you to get one credit report printed by a reputable
source and provide it to the shopping places that may need it for their
reference, without them making another inquiry. The exception to this is for
mortgages, which will combine all inquiries during a 30-day period and
consider them as one inquiry.
As a side note, by law they shouldn't pull your credit without your written
authorization, but many times this occurs without anyone knowing.
Your Assets
Credit scoring has nothing to do with your assets, cash on hand or income.
It is only to do with your debts, your payment history and the factors that
impact the probability to repay the debts. Most of the time, if you have a
clean payment history, a good job, cash in the bank and other liquid assets,
you should have a good if not great credit score. You should get your credit
report periodically however, just to be sure it is accurate.
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