FICO Credit Scoring

What is a credit score and how is it calculated?

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 income, assets, or bank account, although those and other factors are still considered by lenders and investors, independent of the score.

Fair Isaac Credit Bureau scores range from approximately 375 to 900 points and are available through the three national credit data repositories (Equifax, TransUnion, and Experian). All of these three models are often referred to as "FICO" scores. The scoring programs at these credit bureaus area as follows:

• FICO – Experian (TRW)
• BEACON – Equifax
• EMPERICA – Transunion

A Fair Issac Credit Bureau score (FICO) is calculated by a system of scorecards. In developing these scorecards, FICO uses actual credit data on illions of consumers, and applies complex mathematical methods to perform extensive research into credit patterns that forecast credit performance. Through this process, FICO identifies distinctive credit patterns. Each pattern corresponds to a likelihood that a consumer will make 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. These could include the following:

Payment History

• Public record and collection items
• Severity, frequency and recent occurrence of delinquencies noted in trade line section

Outstanding Debt

• Number of balances recently reported
• Average balance across all trade lines
• Relationship between total balances and total credit limits on revolving trade lines

Credit History

• Age of oldest trade line
• Number of new trade lines

Pursuit of New Credit

• Number of inquiries and new account openings in the past year
• Amount of time since most recent inquiry

Types of Credit in Use (number of trade lines reported for each type):

• Bankcard
• Travel and entertainment cards
• Department store cards
• Personal finance company references
• Installment loans
• Other

FICO observes a very large number of credit report histories of mortgage borrower to determine which credit report items or combination of items are the most predictive of future risk; this data indicates the amount each item contributes to an accurate assessment of credit risk.

Why did this credit file get the score it did?

To understand why a credit report scored the way it did, look at the four reason codes given with each score. These are the top reasons, in order of severity, why it did not score higher. Other factors may have contributed. These score factors help borrowers understand how to increase their score over time.

For score factors in the high range, the explanation codes merely point out reasons why the file did not score even higher.

How can a borrower increase their score?

Most credit reporting agencies make a special effort to quickly resolve disputed information affecting a mortgage decision. Consumers wishing to dispute items on their credit files with the credit repository can do so through the following numbers:

Equifax 800-685-1111
Experian (TRW) 800-422-4879
Transunion 316-634-8440

Why can’t some files receive credit scores?

In order to receive a score, a credit bureau file must contain at least one account older than six months and one account that has been reported to the credit bureau within the past six months.

What does a score mean?

A credit score is a means of ranking potential borrowers based on the likelihood that they will pay their credit obligations as agreed. A higher score indicates better credit quality. If all other things are equal, borrowers with a credit score of 620, for example, are less likely to default on a loan than borrowers with a score of 600.

Doesn’t using the score mean fewer people will get the mortgage loans?

No, in fact, the opposite may be true. Credit scoring is just one of several ways that lenders and the secondary market decide whether to lend someone money and under what terms. The lender uses the Credit Bureau Score to determine if the borrower exceeds the acceptable level of risk for the product offered. If the score on a borrower’s credit report is too low, that doesn’t mean it is too low for other products.

Source (With Permission): Republic-Mortgage.com

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