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Credit Scoring

What's it all about?

How do you benefit from credit scoring? | What factors influence your FICO scores?
How can I improve my FICO scores? |
How do your FICO scores translate into credit grades?
Your Credit Rating…A Quick Guide to Credit Grades.


Credit scoring is one of the most discussed topics in the mortgage industry. Creditors- especially in the mortgage industry--frequently use these scores, known as FICO scores, as an important factor in determining the interest rate offered and whether or not to even approve your application for a loan.

So, you are wondering, just what are FICO scores and who generates them? A California-based company, Fair, Isaac has created a complex, proprietary mathematical algorithm. By "back-scoring" millions of credit files using over thirty "data factors" Fair, Isaac has developed historical statistical models. These models are use to compare your credit history against, to assess your current credit worthiness.

Fair, Isaac claims the resulting score is a very accurate predictor of future rates of default or late payments i.e.: of those borrowers scoring; below 60, 1 in 8 would have one or more 90-day late payments; above 70 that number drops to 1 in 123; above 80 only 1 borrower out of 1,292 would have one or more 90 day late payments.

Credit scoring was first developed in the 1950s. In the early 1980s the three major credit bureaus, Experian, Equifax and Trans Union all worked with the Fair, Isaac company to develop generic scoring models that allow each bureau to offer a score based solely on the contents of the credit bureau's data about an individual using their own unique scoring system.

Using their own unique system means the three repositories each use a different version of the Fair, Isaacs scoring model. Here is the interesting part, even though there are three different versions, theoretically, if all three had the very same information on you, your three scores would be identical. That never happens of course, because not all creditors report to all three repositories. Even if a creditor did report to all three recording dates will differ. So, you usually end up with three quite different scores.

How do you benefit from credit scoring?

The widespread use of credit scoring allows for speedy, objective analysis of credit histories. This means, borrowers who score well can get loan approval or credit almost instantly--something unheard of in years past. It also means that borrowers who once might have experienced problems, with individual lenders' prejudices or subjective credit decisions, are less likely to do so. FICO scores are objective and based on large volumes of verified statistical data. Credit scoring brings a new level of fairness to the credit granting process.

What factors influence your FICO scores?

"OK OK," your saying "enough history lessons, just tell me what factors influence a my FICO score so I can qualify for a mortgage with a low rate." Ah ha, that's the big question. Only Fair Isaac knows and they aren't talkin'. They don't want the public to know because that may change behavior and mess up their models.

They have shared some basic information. There are five categories found to be most predictive (with their relative weighting in parentheses) they are:


1. Payment History (35%): Do you pay your bills on time? The more recent the late payments, the lower your credit score. In fact a 30 day late payment on your rent or mortgage today may hurt more than a bankruptcy seven years ago. Then there are the derogatory notes that really hurt like. collections, charge-offs, judgments, liens, repossession, bankruptcy and foreclosure.

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2. Credit Utilization (30%): How many outstanding balances appear on your credit report? Too few or too many can hurt your score. Have you maxed out your credit lines? Keeping balances below 50% of the credit line increases you chance for a higher score.


3. Credit History (15%): The longer your accounts have been open, the better, so surfing for a new lower rate on a credit card and transferring balances can hurt your score.


4. Type Of Credit (10%): How many accounts are reported for large installment bank or credit union loans vs finance companies vs travel and entertainment cards or department store cards, etc.


5. Inquiries (10%): How many inquires and new accounts does your report show, how recent are they and how long has it been since the most recent inquiry? Applying for new credit may lower your score, but multiple inquiries from the same type of creditor- like mortgage companies or car dealers - within 14 days counts as only one inquiry. Promotional or administrative inquiries do not count against the score- only those times that you applied for credit count.

How can I improve my FICO scores?

Well, then, now that we know some of the factors use to compute your score, how can you go about improving it? Certainly the best way is to pay your bills on time. You should also keep your revolving balances below 50% of your credit limit. It is better to keep some small balances on several cards rather than high balances on one or two. Maintain your accounts for a long period of time. Limit the number of time you apply for credit.

What if you have done all that and there is incorrect derogatory information on your credit report? Challenge it quickly with the help of a mortgage professional. Start working with the mortgage professional a few months before you intend to close on a loan. At Rate One Mortgage we recommend you get a loan before you shop for a home. But, in any case, with the increasing amounts of identity theft occurring, you should check your credit report at least once a year anyway.

How do your FICO scores translate into credit grades?

Here is where the scoring systems really get personal. The scores drive the credit grades which determine the rate of interest you will pay. The higher your scores/grade the lower your rate. The lower your scores/grade the higher your rate.

Your Credit Rating…A Quick Guide to Credit Grades.

In this table you will find an example of how lenders divide the spectrum of credit scores into ranges e.g. 720+ = A+ or 551-580 = B. Every lender develops their own matrix with corresponding rates and terms. The trick is how to find which of the hundreds of mortgage companies and thousands of products that will best meet your needs. A lender like Rate One Mortgage will know which mortgage product you need and which companies offering that product has the best rates and terms.


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(Days Late)
30 -  60 - 90


(Days Late)
30 -  60 - 90


(Days Late)
30 -  60 - 90

A+ 720
0 - 0 -  0 0 - 0 -  0 0 - 0 -  0
A 680 38 100 0 - 0 -  0 1 - 0 -  0 0 - 0 -  0
A- 640 41 97 0 - 0 -  0 3 - 0 -  0 1 - 0 -  0
B+ 620 45 95 1 - 0 -  0 3 - 1 -  0 2 - 0 -  0
B 580 60 85 3 - 1 -  0 4 - 2 -  0 2 - 1 -  0
C 550 55 85 5 - 3 -  0 8 - 8 -  4 5 - 3 -  1
D 525 50 80 6 - 4 -  2 10 - 10 -  6 10 - 8 -  3

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