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What Is Credit Scoring? Credit scoring is the process of
evaluating collected credit account and payment history data on an
individual in order to objectively determine that persons credit
worthiness. The scores, sometimes referred to as FICO scores, are
calculated at the very instant that the credit report is generated,
and therefore these scores can change from one credit report to the
next even within a very short period of time. Scores generally range
from 350 – 850 and are intended to inform the creditor of the level
of risk they would take by offering credit to that individual: the
higher the score the lower the risk level. The credit report is a
“snapshot" of the persons credit file at that particular time.
Who Collects the Data?
The three primary collectors of payment history data are:
Experian, TransUnion, and Equifax; known as the “Bureaus” or
“Repositories”. Creditors contract with the bureaus of their choice
in order to send them the data. The bureaus analyze data on millions
of consumers to determine payment patterns, which help predict the
likelihood that the individual will make their future payments on
time.
Why 3 different Scores?
Each bureau utilizes its own computer software “scoring model” to
crunch the data and calculate a score, one reason for the difference
in score between bureaus. Furthermore, the details of the data from
a single creditor often differ from one bureau to the next, another
reason for the difference in score between bureaus. To determine WHY
the score is not higher simply look at the Reason Codes listed under
the score. These reasons are listed in order of impact from top to
bottom and indicate the primary calculating factors. Factors not
listed are affecting the score, but to a lesser degree. Use these
reason codes to help guide your customer on how to raise their
scores.
Mortgage Credit Score
People are often surprised to see that the credit score obtained
by mortgage brokers differs from the credit score obtained from one
of the above three agencies. The difference is in the amount
of time covered in the reports. Consumer credit reports (like
the reports provided from Experian, TransUnion, and Equifax) look at
a person's entire credit history. Mortgage credit reports only
deal with data from the last two years.
What Data do the Scoring Models evaluate?
The scoring models evaluate all of the information in the
individuals credit file, both good and bad. The scoring models DO
NOT consider: income, employment, race, gender, nationality, address
or interest rate on accounts when calculating the score.
Breakdown of Scoring Calculation
*Past Payment History (35%)
*Outstanding Debt Utilization (30%)
*Age of accounts Established (15%)
*Type of Credit Being Used (10%)
*Pursuit of New Credit / Inquiries (10%)
Points of Interest on Calculation breakdown:
- Severity, recentcy, and frequency of delinquencies noted on
trade lines is a primary indicator of risk.
- Recent late payments and other “derogs” are more indicative of
future default than are older, more isolated occurrences. Derogs
begin to lose potency after 24 months. The scoring models are
looking for recent patterns, GOOD payment patterns are considered
when scoring.
- IE: Someone who has missed just a couple of payments in the
last 2 months, would be a higher risk than someone with much
older more severe delinquency.
- The number of sizable outstanding balances is predictive of
risk, as is the proportion of those balances relative to credit
limits. 30% or less of credit limit is optimal balance amount to
carry.
- Look at the “Date Opened” column for an indication of how long
accounts have been established. Short history could indicate some
risk, but only if other negative factors exist.
- The number of inquiries and new account openings in the last
year and the length of time since the most recent inquiry are
potential indicators for caution. The balance of the file must be
considered.
- Scan for the types of tradelines on the report. Finance
company accounts will negatively impact the score more heavily
than bankcards, store cards, or auto loans. Credit through Finance
Companies indicates potential risk due to consumer’s inability to
obtain credit from less expensive sources.
How do Inquiries Affect the Scores?
All credit reporting sources have Subscriber Codes which indicate
to the bureaus the purpose of the credit information request, ie:
mortgage loan, auto loan, credit card account, consumer inquiry,
etc.
- Consumer Inquiries from sources such as: FreeCreditReport.com,
MyFICO.com, etc. DO NOT affect scores.
- Inquiries for obtaining credit can affect scores from 2 – 50
points depending on other variables in the file. Refer to reason
codes to assess whether inquiries have affected score(s).
- Multiple inquiries, regardless of quantity, for Mortgage loans,
made within a14 day period are counted as only 1 inquiry. This is
called the
De-Duping Period.
- Furthermore, any Mortgage inquiry made within 30 days of the last
lender inquiry will be shown on the report but will not adversely
affect the score.
- Promotional or Employment inquiries do not affect scores.
How can an Individual Improve their Scores?
Credit scores will improve as an individuals’ overall credit picture
improves, however this process takes time.
- Encourage your customer to pay down revolving account balances to
below 30% of the High Credit Limit.
- DO NOT tell customer to close accounts, unless the reason codes
indicate that there are too many revolving accounts and all of these
have little or no balance. Closing well-seasoned accounts is not the
best idea.
- DO NOT tell customer to consolidate debt onto a few cards and
close other accounts. Rather, have them spread balance among cards
to achieve 30% or less balance / credit ratio on as many cards as
possible.
- DO NOT recommend any type of Consumer Credit Counseling, they can
wreak havoc on the credit file and lenders often require such
relationships be terminated prior to any approval.
TIP #1: Always view credit report in the CIS.Meridianlink website, and
use WEB View / PREQ as opposed to PDF view of report. WEB View gives
you a tool to Unmerge each tradeline to see bureau reports
separately (use our HELP menu for more on that and other tools).
TIP #2: Remember that credit scores are fluid numbers
that change as the elements in your credit report change. Scores
may be different from lender to lender (or from car loan to
mortgage loan) depending on the type of credit scoring model that
was used. Because of all the different factors it is NOT
advisable to try to "fix" your credit score without talking to a
professional first.
What about Rapid Re-Score?
Rapid Re-Score is a service offered by the bureaus, via CIS, for
quickly correcting erroneous information in the individuals credit
file. The bureaus require a letter from the creditor which states
exactly, and specifically, what needs to be corrected in the file,
and there is very little wiggle-room on what they will accept.
Whenever you are considering utilizing Rapid Re-Score please be sure
to first use the CreditXpert credit analyzer that we offer, and
contact CIS to discuss those tradelines.
- Rapid Re-Score takes approximately 72 hours from the time the
bureaus receive the documentation, so don’t waste time getting it
started, have the borrower start working on getting the letter(s)
for creditor(s) ASAP. We can guide you on what the letter needs to
say, just call us.
- Rapid Re-Score is not cheap, so make sure that you and your
customer know how much the charge is and be prepared to pay up front
for the service.
- Use Rapid Re-Score to remove derogatory accounts that do not
belong to the borrower; or to remove incorrect late payments, etc.
- Do not use Rapid Re-Score to show collections as PAID. This action
will usually LOWER the score(s).
- RESULTS OF RAPID RE-SCORE AND CREDIT ANALYZER ARE NOT GUARANTEED.
What about Disputes?
Every consumer has the right to dispute information which appears in
their credit report. You can find details on how to file disputes on
the various bureaus Websites.
In general the borrower will need to:
- Get a credit report direct from the bureau(s) with which they are
disputing information. The report will be free if requested within
30 days of a denial of credit.
- Send a letter with any supporting documentation to the bureau(s)
via overnight mail with a return receipt requested.
The Fair Credit Reporting Act gives the bureau 5 days to notify the
creditor of the dispute and to request an investigation. Within 30
days the creditor must report back to the bureau regarding whether
the information should be modified, deleted, or remain unchanged. If
there is no response from the creditor then the bureau must remove
the information from the file. However, if within 10 days after that
the creditor reports that the information was correct then the
bureau will add that info back to the file. The bureau must then
notify the consumer of this within 5 days.
Note: Make sure that any corrections made to bankruptcies or
collection accounts reflect the correct Release or Clearance dates
rather then the current date. You do not want the 7-10 year clock to
start over at day 1.
How long will that remain on the credit report?
- Closed Accounts: Indefinitely
- Collections: 7 years.
- Bankruptcies: 10 years from released date.
- Judgments: 7 years from Satisfied date.
Additional Credit Resources:
Websites:
Organizations:
Legislation:
Fair Debt Collection Practices Act
Fair Credit Reporting Act
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