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Houston Mortgage Company
Your
Credit Rating
Bill Fair and Earl Isaac created
decision making solutions to a wide
range of industries; one being Credit
Reporting. Thus we have the company name
FAIR ISAAC Co. or "FICO". The company
claims it pioneered credit scoring
although it took over 35 years before
the credit industry began to use
scoring. Because lenders and credit
reporting agencies were involved in a
growing number of lawsuits alleging bias
and discrimination in their credit
granting process; credit scoring was
thought to provide an unbiased framework
for decision making related to credit
"risk".
Although income and assets play a major
role in approving a mortgage loan, your
credit history is critical in the
outcome of this process and the interest
rate at which credit is granted. You
need to know your "Credit Rating" and
the affect it will have on the terms of
your credit.
How the FICO Rating System Calculates
Your Credit Score
The FICO Scoring Model is proprietary
and not published but we do know that
the model contains 33 variables that
were found in combination to be
predictive of an individual's future
ability to repay a loan. These
variables are grouped into 5 categories:
-
Payment History
- accounts for approximately 35% of
your score.
-
Amounts Owed
- accounts for approximately 30% of
your score.
-
Length of Credit History
- accounts for approximately 15% of
your score.
-
New
Credit
- accounts for approximately 10% of
your score.
-
Types of Credit in Use
- accounts for approximately 10% of
your score.
What FICO Scoring Ignores
FICO Scoring ignores your race, color,
religion, national origin, sex, and
marital status.
In addition, it ignores:
Your age
Your salary, occupation, or employment
history
Where you live
Certain types of credit inquiries
(requests for your credit report):
-
The score does not count consumer
disclosure inquiries (requests that
you've made for
your credit report to check it).
-
It does not count promotional
inquiries (requests by lenders in
order to make you a pre-
approved credit offer) or
administrative inquiries made by
lenders to review your account
with them.
Moving to Springfield
Since credit scoring is here to stay,
it's important for you to know the
information contained in your credit
report and how it affects you when
applying for a mortgage.
When applying for a mortgage, there are
three credit scores for each borrower on
the loan application. The lender
obtains FICO Scores on each individual
from three major credit bureaus,
Equifax, Trans Union, and Experian. Each
bureau has your credit score and all
label it with a different name, Beacon,
Empirica, or Fair Isaac. Although the
score names are different, they each use
the FICO Scoring model. You will notice
that the three scores are different
between bureaus. Creditors do not report
to each bureau and items of public
record such as bankruptcies and
judgments are not picked up by each
bureau. As a practical matter, the
lender normally uses the middle score in
it's evaluation of your risk profile
(probability you will repay the
loan). What is the minimum and maximum
score? As an example, Experian's scores
range from 350 to 900. Can an individual
receive a zero or no score? Yes,
occasionally a credit report is issued
with no score when there is insufficient
data to review.
Accompanying every credit score are four
"reason codes". These codes identify
some of the 33 variables that had the
most influence in lowering your credit
scores. Examples of the 10 most common
reason codes are:
1) Serious delinquency
2) Serious delinquency and public
record or collection filed
3) Derogatory public record or
collection filed
4) Time since delinquency is too
recent or unknown
5) Level of delinquency on accounts
6) Number of accounts with
delinquencies
7) Amount owed on accounts
8) Proportion of balances to credit
limits on revolving accounts too high
9) Length of time accounts have been
established
10) Too many accounts with balances
How Long Does Your Credit History Remain
on Your Report
The length of time information remains
on your credit file is shown below:
Credit Accounts -
Accounts paid as agreed remain for
up to 10 years*
Accounts not paid as agreed remain
for 7 years*
Collection Accounts remain for 7 years*
* These time periods are measured from
the field on your credit report titled
"Date of Last
Activity" for each credit account.
(The question remains as to what
constitutes the the
last activity date on the
account.)
Courthouse Records (Public Records
section of your report)
Bankruptcy - Chapter 7 & 11 remain
for 10 years from the date filed.
Bankruptcy - Chapter 13
non-dismissed or non-discharged remains
10 years from date
filed.
Unpaid Tax Liens remain indefinitely.
Paid Tax Liens remain for up to 7 years
from date released.
Paid or Unpaid Judgments remain on file
for 7 years from date filed.
(New York State Residents Only:
Satisfied judgments remain 5 years from
the date filed, paid collections remain
5 years from date of last activity.
California State Residents Only: All tax
liens remain 7 years from date filed.)
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