Credit bureau scoring is a
statistical means of assessing how likely a borrower is to pay back a
loan. A Credit Bureau Score is based on
the data available in the borrower’s credit report. The score measures the relative degree of
risk a potential borrower represents to the lender or investor. It is not a measure of a borrower’s income,
assets, or bank account, although those and other factors are still considered
by lenders and investors, independent of the score. A Credit Bureau Score does not include any of
the following in the score calculation as this would be discrimination by FCRA
guidelines: gender, race, age, or Zip Code.
Fair, Isaac Credit Bureau Scores
range from approximately 300 to 850 points, and are available through the three
national credit data repositories:
Equifax (800) 685-1111
Trans Union (800)
888-4213
Experian (800) 397-3742
Each bureau calculates its own score, based solely on data
within its individual credit file.
A Fair, Isaac Credit Bureau Score,
sometimes referred to as a FICOSM score,
is calculated by a system of scorecards.
In developing these scorecards, Fair, Isaac uses actual credit data on
millions of consumers, and applies complex mathematical methods to perform
extensive research into credit patterns that forecast credit performance. Each pattern corresponds to a likelihood that
a consumer will make his or her loan payments as agreed in the future. The score is based on all the credit-related
data in the credit bureau report – not just negative data such as missed
mortgage payments or bankruptcies.
The types of credit information used
in the credit bureau scorecards are typically the same items an underwriter
would use to make a credit decision. The
final score is based on the following factors:
Payment
History (35%)
·
Public record and collection items
·
Frequency: indicator of 90 day later
·
Severity: accounts over 30 and 60 days past due
o 0-6 months: Major effect
o 7-12 months: significant
effect
o 13-24 months: lesser
effect
Outstanding debt (30%)
·
Number of balances recently reported
·
Average balance across all trade lines
·
Current Balance versus Credit Line Limit:
o Over 75%: Major effect
o Over 75%: significant
effect
Note: Accounts with small balances score
better than zero balances.
Credit History (15%)
·
Age of oldest trade line
·
Number of new trade lines
Pursuit
of New Credit (10%)
·
Number of inquiries and new account openings in the last year
·
Amount of time since most recent inquiry
·
Multiple inquiries for mortgages and auto loans within 30 days
are lumped as one single
inquiry.
Type of Credit (10%)
The credit engine looks for a good
mix of the following types:
·
Bankcard
·
Gas, travel and entertainment cards
·
Department store cards
·
Installment Loans
·
Finance Companies: these often
are given a negative score, since they are
Commonly provided to people
with substandard credit.
Fair, Isaac observes a
very large number of credit report histories of mortgage borrowers to determine
which credit report items or combination of items are the most predictive of
future risk: this data indicates the
amount of each item contributes to an accurate assessment of credit risk. Fair,
Isaac does not use race, color, religion, national origin, sex, marital status,
or age as predictive characteristics.
Occupation and length of time in present residence are also not used in
the Credit Bureau Score. Also, any
information that is not present in a repository credit file is not used in
creating a Credit Bureau Score.
What Will
Lower Your Score?
- Consumers who consistently mess up
- Spending near the limit of your total available credit
- 90 days late and you have other delinquent accounts
- Being an authorized user on someone else's account with good credit will no longer help your score
What Will
Not Lower Your Score?
+ Mess up every so often
+ Won't get dinged as hard when you apply for credit from multiple
sources
+ Having a mix of credit types, like having a credit card,
mortgage, and auto loan at the same time
+
If you're 90 days late on payments on one account and your other credit
accounts are in good standing
The
Lower Your Score, The Higher Your Costs of Borrowing
Fannie Mae and Freddie
Mac, for example, charge higher up-front fees to borrowers with credit scores
below 740. For a buyer with a credit score between 680 and 700, the fee comes
to 1.5% of the mortgage principal. On a $400,000 mortgage, that adds up to
$6,000. Someone with a 740 score pays nothing. Lower-score borrowers also get
saddled with higher interest rates, about a 0.4 percentage point more for the
below 700 borrower. That costs an extra $124 a month — $1,488 a year — on a
$400,000, 30-year, fixed rate loan.
Mike
Ervin
Senior Mortgage
Banker
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