Credit scoring is nothing new. Credit card issuers
have used credit scores for years to evaluate
applicants. Most mortgage companies have been using credit scores in their approval
process. With increased automation in the credit approval process and the shift
by lenders to "risk–based pricing," your credit score is becoming
a major factor in determining whether you are approved and what terms you get.
Your credit score is a number usually derived from data maintained electronically
by national credit repositories using a statistical model. The credit score is
a number that tries to predict your future behavior based upon past history. It
may well determine how quickly and hassle–free your loan is processed, beyond
a yes or no at the application table.
What is a credit score?
Your credit score isn't the same as your credit file, though it is derived from the data in your credit file. Your credit file is a listing of your accounts and payment histories with lenders, while your credit score is a snapshot ranking that attempts to predict your future behavior. There are different types of credit scores. Credit bureau scores are based solely on information in consumer credit reports, other types of scores may also include information from credit applications or bank files. Information such as race, religion, gender, marital status and birthplace are not included. A common scoring model used by lenders, among the many available, is FICO, developed in the 1960s by Fair Isaac & Co. of San Rafael, California. Your credit file data at the three national repositories––Experian, Equifax, and TransUnion–– is put through Fair Isaac's mathematical scorecards and yields a number between 300 to around 900.
What goes into credit scoring?
Fair Isaac's model focuses on interrelationships among roughly 100 predictive variables, including the number of jobs you've held, marital status, how long you have been living at your present home, how long you have been a credit user, how you've used credit lines, how actively you are seeking new credit, your level of indebtedness, and the like. The higher your score, the less likely you are to default on your loan, statistically speaking that is.
What is my credit score?
Although your credit score may play an important
role in determining whether and on what terms you receive a loan, you have no
legal right to demand to see your score or receive information on how it's
interpreted by your lender. Many consumer advocacy groups criticize this process
as elusive, unfair and potentially damaging to consumers. The credit industry
has no simple answer to what exactly determines your score or how to improve it.
In theory, credit scoring is meant to increase the speed, efficiency and fairness
(removing biases) of the lending process. It was not meant to be used as the sole
determining factor as to whether an applicant deserves to be approved for a loan.
Unfortunately, some lenders still use it that way.
New Credit Scoring Rule Benefits Mortgage Shoppers
Consumers shopping for a mortgage will be
happy to learn that a new rule now protects them while they are shopping for the
best rate. Currently, when a mortgage originator requests a copy of an applicant's
credit report, this appears as an inquiry on that report. Throughout the home–buying
process, consumers may have their applications presented to a number of lenders
over a slightly longer period of time, thus generating a number of inquiries on
their credit report. According to Fair, Isaac and Company, research shows that
borrowers who are pursuing additional sources of credit may represent a higher
risk than those who are not. Multiple credit inquires generated through loan shopping
may have the effect of driving down an individual's credit score. For a consumer
on the edge of qualifying for a loan, this reduction in their score may serve
to make them ineligible for funding. In order to reflect the realities of the
marketplace, Fair, Isaac's models compensate for this type of short–term
activity by treating a group of inquiries occurring within a 7–day period
as a single inquiry. In the latest upgrades of its scoring models, Fair, Isaac
has increased the inquiry window from 7 to 14 days, enhancing opportunities for
consumers to shop for a mortgage without negatively impacting their scores.
How to Improve Your Score
Here are some basic do's and don'ts which should help boost your scores:
Do check your credit
report regularly. If you discover incomplete, or inaccurate information, have
it corrected, especially before you apply for any loans. Incomplete or inaccurate
information can negatively impact your score, particularly if it is derogatory.
Don´t max out your credit cards. Better yet, keep the balances well below your credit limit. It is statistically better to have smaller balances against more cards than to have high balances relative to your credit limits lumped on a few cards. Don't view your credit limit as your spending limit. The important thing is to never look "extended."
Do pay your bills on time. This is one of the most important factors in your credit score and it is significant over time. Late payments (30/60/90) and, worse yet, missed payments, which give the impression that you do not take your financial obligations seriously, can destroy your credit rating.
Don´t apply for credit, or open new accounts, unless you need to. Too many inquiries, as well as too many accounts, are viewed negatively by credit extenders. Therefore, in order to put yourself in the position of getting the credit you need, when you need it, never create the impression that you are always on the prowl for credit.
Do negotiate with your credit
card companies to secure lower interest rates. Before you simply close a high
interest rate account, contact the issuer and see if you can negotiate a better
deal. While you should always strive to get the lowest rates, lenders always look
at your stability (i.e., how many long term accounts that you have). Therefore,
it is important to show that you make your payments on time and you have long
term relationships with your lenders.
Don´t card hop. While it is important to seek out the best rates, if you appear to be someone who jumps from lender to lender, this will not help your credit rating. Longevity of accounts is the name of the game. If you continually open and close accounts, you will not develop the type of stable credit history credit extenders want to see. Therefore, if you do find a significantly better rate, don't close the higher rate account. Pay it off and then request that your credit limit be reduced to $100. This way you get out from under an onerous rate, while keeping the credit reference.
Don´t move or change jobs too often. They key word here is stability. If you have additional questions about credit scoring issues, contact your local Federal Trade Commission office or write to: Correspondence Branch, Federal Trade Commission, Washington, D.C. 20580. While the FTC cannot resolve individual problems for consumers, it can act when it sees a pattern of possible law violations.
