By Kenneth Harney Syndicated
Columnist - Seattle Post Intelligence - January 25, 1998
WASHINGTON - Your credit score - that mysterious
three-digit number that frequently determines whether and at
what interest rate you qualify for a home mortgage - is about
to become more consumer-friendly.
The company whose statistical scoring models are most
widely used in evaluating mortgage applicants nationwide is
changing the way it factors in credit-check "inquiries" on
credit-bureau files to compute credit scores.
The net result of the changes by San Rafael, Calif. -based
Fair, Isaac and Co. Inc. should be to minimize the negative
effects that aggressive rate-shopping can have on mortgage
applicants' credit scores. Those scores, widely known as
"FICO" scores, are now used by most major lenders to
gauge the risk of future default by prospective loan
applicants.
A high FICO score means lower risk to the lender and can
open the door to a quicker loan decision and possibly a
lower rate. A low score can trigger outright rejection of an
application or a higher interest rate.
FICO credit scores are generated from proprietary statistical
models located at each of the three major credit repositories
- Equifax, TransUnion and Experian (formerly called TRW).
The repositories receive information on the credit behavior of
millions of Americans from banns, credit-card companies,
mortgage lenders, retail merchants, and store and update the
information electronically.
Fair, Isaac's statistical models attempt to predict risk by focusing on borrowers' repayment patterns with creditors, the length of borrowers' credit histories, the total amount of credit that borrowers have access to and are using, and whether borrowers are actively searching for additional credit. The repositories learn that consumers are seeking more credit because they maintain records of every request - or "inquiry" -to see an individual's credit file.
Inquiries work like this: Say you're interested in buying a new car, and you visit a half dozen auto dealerships to locate the best deal. At each dealership, sales personnel obtain your name and address, and possibly you Social Security number. While you're sitting in tile showroom or doing a test drive, the dealership may be running a quick credit check on you, to check if you're really qualified to handle the purchase. Every one of those credit checks ends up as an inquiry on your electronic file.
Though Fair, Isaac and Co. has never publicly revealed technical details about how its statistical models work, it confirms that inquiries do count as a "risk factor." In general;, the more inquiries you have, the greater the
probability that you're seeking to increase your access to more credit, and possibly increase your total indebtedness. That, in turn, can depress your FICO score.
The impact of multiple inquiries on credit scores has generated controversy among some homebuyers and refinancers. Some mortgage applicants have claimed that their scores were unfairly lowered by credit-check inquiries they never knew about, or that simply represented intensive shopping for a car, furniture or a mortgage. One Chicago homeowner, Eric Pawlowski, complained publicly last October that just two recent inquiries on his credit report knocked more that 50 points off his FICO score, and caused a lender to raise his equity-loan rate quote from 10 percent to 16 1/2 percent. A Fair, Isaac spokeswoman denied that two inquiries could depress a FICO score that dramatically, but declined to specify' what the likely point decrease per inquiry might be.
FICO scores range from a high above 800 to 400 or below. The biggest sources of mortgage money, Freddie Mac and Fannie Mae, generally view scores of 620 and above as acceptable risks. With loan officers assigning increasing importance to strict score-cutoff levels, any factor that depresses your score may be significant, even if it's just 10 or 20 points. Moreover, multiple credit inquiries on your file may signify nothing more than that you're doing some heavy-duty rate shopping.
Fair, Isaac has dealt with the "shopping" inquiries issue in the past by lumping together all inquiries from similar categories of creditors within a seven-day period and counting them as a single inquiry. For example, if you had 10 inquiries on your file from mortgage lenders in the first week of December 1997, as you shopped for a refinancing, they'd all be counted as a single inquiry for the purpose of computing your score.
But seven days can be very short for serious shoppers, especially in a declining-rate environment. So Fair, Isaac has decided to adopt a new; more generous standard: Starting in the next few weeks, mortgage hunters will get a new 14-day shop-ping period, during which all home-lender inquires will count as one. And, better yet, there will be a new "buffer" period that ignores all mortgage and auto-related inquires in the 30 days prior to scoring.
The bottom line here: Refinancers and new mortgage
applicants no longer will be penalized at the credit window simply because they
shopped hard for longer than a week. | 
