The Loan Arrangers Show

Credit scoring is a quick, accurate and consistent scientific method for assessing credit risk. Your credit scores are based on data stored by a accredit repository about your credit history and payment patterns. Statistical models that assign points to factors indicative of repayment calculate credit scores. These scoring models exist in software utilized by credit bureaus or lenders. Credit scores are based on data rather than human judgment, making credit scoring an objective risk assessment tool as opposed to a subjective, possibly discriminatory, human interpretation of information. Even the best underwriter cannot match scoring's statistical ability to weigh and measure hundreds of factors and reach a number indicating relative credit risk in a matter of seconds. The resulting score is a "snapshot." It sums up what your past payment performance and current usage of credit say about your level of credit risk to the lender. Because the score is a composite of all the applicant's credit information, No single factor like a late payment or even a bankruptcy - will be the sole cause of a n unacceptable credit score.

What Data Is a Repository Scoring Model Based On?

Scoring Models DO NOT consider:
Race, gender, religion, marital status, income, nationality, neighborhood, employment history, position or title, sexual preference, or interest rate being charged on a particular card.

Scoring Models DO include:
NOT just the negative credit information such as late payments and bankruptcies, but all the credit information stored in the repository's credit file on you at the time of the request.

Past Payment Performance - (35% of the credit score's weight)

The fewer late payments, judgments, liens or collections, the better. Zero negative entries on your report usually indicate a lower risk.
Recent late payments are more indicative of future defaults by you than those that occurred more than 24 months ago.
A 30-day late payment by you today will have a greater negative impact on your score than a bankruptcy five years ago with clean credit since.

Credit Utilization - (30% of the credit score's weight)

Low balances on several credit cards are better than high balances on a few cards. Balances on your cards should be kept at or below 30% of the available maximum credit limit.
Too many credit cards can be detrimental.
WARNING: Do Not Close Any of Your Accounts Without First Discussing your Complete Credit Profile With Your Mortgage Professional. Your Score Could Go Down!!

Credit History - (15% of the credit score's weight)

The longer accounts have been opened and in good standing, the lower the risk indications are about you.
Opening new accounts and closing your seasoned accounts will negatively impact your score. Avoid "credit surfing."
Established credit history is relative to your past payment performance and how high or low your credit usage may be. Self discipline in utilizing credit shows lower risk.
A short credit history does not automatically indicate that you are a high credit risk, as long as you are not a heavy user of credit and your payments have been made on time. Keep your balances on cards low!! To get a score, you should have one account opened for at least six months.

Types of Credit In Use - (10% of the credit score's weight)

Finance company accounts will score lower than the accounts you secure through banks or department stores. If the predominance of your accounts are with finance companies only, it may appear you cannot qualify for a better type of credit.
"90 days same as cash" and deferred payments generally are funded by finance companies, so this variable is a weak indicator for the average consumer.

Inquires on Your Report - (10% of the credit score's weight)

Looking for new credit can indicate higher risk if several credit cards are applied for in a short period of time and your existing cards have been charged to their maximum limits.
Multiple inquires, regardless of the number, for mortgages or autos, in a 14-day period of time only count as a single inquiry in their impact on your score.
Additionally, any mortgage or auto inquiry made about your credit file within 30 days of the current lender's inquiry, will not impact your score due to buffers within the credit scoring models.
Promotional or administrative inquiries shown on your credit report DO NOT adversely impact your score.
Only the first seven inquiries made by different trade lines shown on your credit report will actually be factored into the impact on your score.
Only Inquiries Authorized By You For The Purpose of Being Granted New Credit Lines Will Impact Your Score

How To Improve Your Credit Profile and Score

There is no magic to improving your credit score. Credit scores automatically improve as your credit profile gets better. Improving your credit profile is not always a quick fix, however, Here are a few things to remember:

Pay down all your credit card balances to below 30% of the available credit balance.
Do not consolidate accounts on to one or two cards and close other accounts. Low balances on a few cards are better than high balances on the one or two credit cards you still have left open. Consolidation of your balances will artificially skew the appearance of your credit utilization.
Keep the number of credti cards you won to a conservative number, but don't close accounts without the advice of a knowledgeable mortgage broker.
Review your credit report for accuracy at least 90 days before you intend to apply for a mortgage. Have any inaccurate information on your report corrected at the repository that is reporting the erroneous information on your report.
Understand that paying off a collection account or judgment, for example, will not eliminate it from your credit profile. Paid or satisfied negative credit items will show a zero balance, but will not disappear from your credit profile for seven years - they still reflect a late or a collection account even if you paid it off

How Does Credit Scoring Help You?

Credit scoring is not a crystal ball, but it helps lenders make more informed decisions and offers real benefits to the consumer.

Credit scoring evaluates all applicants by the same criteria. Opinions do not enter the scoring equation.
Changes in your credit performance will chage your credit score. While "scoring scales" remain constant, your place on the scale will change as your individual credit patterns change.
Scoring speeds up credit decisions. Scores help lenders make decisions more rapidly, and often with less documentation.
Scoring helps make more credit available to the borrowing public. With more credit available, the cost of credit to you decreases.

How Do You Correct An Error On Your Credit Report?

Ask for a Credit Dispute form from your mortgage broker.
Complete one form for each inaccurate piece of information on your credit report. Attach any documentation yo might have to support your claim. Be sure to print your name, address, phone number and social security number on the form. Sign and date the form.
mail the form to the reporting repository with a return receipt requested.
Per the Fair Credit Reporting Act, the repository has five days to notify the specific trade line of the dispute. Within 30 days, the trade line must complete its investigation of the item and report back to the repository with its findings and the need for modification or deletion, if applicable. If there is no response from the trade line, the repository must remove the item from your credit file. If a change is to be made to the consumer's credit file, the repository must notify the consumer in writing within five days.
After notification by the repository of the correction or change, a new credti report may be run to get a new score for underwriting purposes.
You can receive a credit report from each of the three repositories for approximately $8.00 each or for free if you request one within 60 days of being declined for credit reasons.
Ask your mortgage broker about the rapid re-score resolution process if you have inaccuracies on your credit report.

Source: National Association of Mortgage Brokers - NAMB thanks Fair Isaac for its help in modifying scoring models to better serve the mortgage applicant, and for its assistance and permission to use this information. For additional information visit www.MyFICO.com