What is a credit score? In 1956, Bill Fair and Earl Isaac got together and created a statistical model that attempts to quantify Credit worthiness. They tried mightily to sell the idea to major businesses to poor success. It wasn’t until their very first business client, Sears and Roebuck, started using it that others followed their lead. In the 1990’s both FNMA and FHLMC started using the information in analyzing previously obtained mortgage loans, looking for trends and VOILA, the credit system we have today was born.
The Three credit repositories (Equifax, Trans Union, and Experian) began using a detailed computer scoring model to asses risk. The mortgage industry as a whole has slowly embraced this concept and it has permeated all facets of the industry today. By using complex statistical models, they have found that there is a direct correlation to one’s score and the likelihood of a missed or tardy debt payment. Specifically a score is a numerical value that attempts to predict the LIKELIHOOD A CONSUMER WILL BECOME 90 DAYS LATE ON ANY TRADE LINE WITHIN THE NEXT 24 MONTHS.
There are 5 pieces to the scoring model. They are (with the percentage of value)… Payment history (35%), Amounts owed (30%), Length of Credit History (15%), New credit (10%), and Types of credit used (10%)
There are things you can do that may immediately impact your score. And there are aspects beyond your control. Always paying your debts on time is step one, but reducing balances and watching total available debt is another. The age of an account is an element, one we will address shortly.
As stated above, your repayment history has the single highest impact of any other factor. The bureaus are very private about their models and we have only learned pieces of the overall calculations, but we have been able to gather some valuable information. If used properly, the information we have could possibly help you raise a score or maybe help you limit the damage to a score.
After you have chosen your loan and then structured it appropriately the next step (and a big one) is choosing the best time to insure your rate or “LOCK” your rate. This is something we take very seriously. We have a wealth of information available to us but on top of that, we have the knowledge of what it means. We can seldom foresee what’s going to happen next month or even next week. But we can take the pieces of information available, assemble the puzzle and tell you what is likely to happen today or maybe tomorrow. So we can not say what will happen next week, but we may be able to tell you what is likely to occur tomorrow… SEVEN TIMES.
Here at Mortgage Choice Inc, we have chosen our Investor partners carefully and have negotiated unique terms with them so as to keep you the consumer in the best possible position. We have essentially turned the “Rate Lock” and the stress level that goes with it… into opportunities to continue improve your financial position. Now if you are wondering WHY we would do this? Ask yourself this one simple question… What is the one thing that your Mortgage broker could do for you that would most certainly positively impact your decision to refer friends and to use them again and again? If we can Improve your rate after we have already agreed upon a fair rate, wouldn’t you like that? So the question should not be Why WOULD we do it? The question is Why doesn’t EVERY BROKER do that? WE DO!!!
It is generally viewed that someone accessing finance companies for credit could have a financial issue. BUT, guess what, most of those Home Improvement stores, and Furniture stores, and Big Electronics stores….. the ones that offer 6 months no interest, 12 months no payments, or even better terms… they are almost all offering financing thru what is viewed as a finance company. You must be careful when accepting credit from these places.
If you’re applying for a mortgage and you have 705 credit score, and the mortgage program you want requires a 700 score, and you go and use 12 months financing with no payments thru a finance entity, there is a possibility that your score could fall. Now no one can say exactly what the impact will be, but it will likely cause the score to fall because you have obtained new credit, and used a finance company to obtain that credit.
If you have a revolving account that is 3 yrs old and you close it, now the overall age of your open accounts is reduced and may lower your score. Remember, length of credit history could count for as much as 15% of your total score. I am not saying don’t pay off old accounts. Nor am I saying not to close them. I am only saying that doing so MAY impact your score. But let's not get too worried. A person with a 740 credit score should really not be too concerned with whether their score drops a few points.
If you have 3 credit cards with a total of $5000 outstanding on a total of $15000 in available credit, spread it out. The models watch the percentage of debt as compared to the actual available credit (credit limits) on each card and also as a cumulative.Here are the actual “break points” used by the models for each individual account and also for the cumulative of all accounts …
So you could have $15,000 in available debt spread over 3 accounts and the model looks at each account and also at the total. So if you have 3 accounts with $5000 available, and you have one card maxed out and two empty cards you will be negatively impacted for having one card maxed out, but you will take the minimal impact for only having 33% of your total limits accessed. Suggestion… spread out the $5000. Maybe you have a card with ZERO interest and you want to use that to your benefit. That is fine, but be aware of its impact.
There are only two types of credit inquiries… VOLUNTARY and INVOLUNTARY. A VOLUNTARY inquiry is one where you give specific permission for a creditor to inquire in an effort to obtain credit. Every other credit report inquiry is INVOLUNTARY. INVOLUNTARY CREDIT REPORTS do not in any way impact your score. Employment inquiries, promotional inquiries, skip trace inquiries, and many others are classified as INVOLUNTARY. They have no impact. Remember, if it is not VOLUNTARY, it is INVOLUNTARY, and has no impact.
“I don’t want too many mortgage lenders to pull my credit because it will hurt my score”. I assume you have heard this one. Here’s the truth…. ALL mortgage inquiries during a 30 day period only count as one credit report inquiry. If you have credit inquiries by 15 lenders in a 30 day period, its only counting as one. And if you have your credit pulled by one of those mortgage lenders inside the next 14 days it still doesn’t count again. And 14 more days, and so on and so on… Over a 6 month period, you could have your credit pulled once in the first month and every two weeks thereafter for 6 months and it would only show up as one report. In one 30 day period, one credit report or twenty… doesn’t matter. This is true only for mortgage lenders and car dealers. So the lesson is… If you are rate shopping, do all of the shopping inside 30 days.
We can go on and on. I have literature I will be happy to share with you about your credit score and how you can positively and negatively impact it. Just ask me when we meet.
There are only 3 bureaus in the US. These bureaus do not necessarily have the same exact information and also do not have the exact same scoring models. Remember the bureaus do not grant or deny credit. They do not create credit, they only store what is presented to them. If you have a specific concern about erroneous items it is always best to discuss it first with the creditor reporting the information. If, however the creditor will not address your concerns, you may contact the bureaus directly to dispute information they are disclosing. Note… only discuss information that is being reported by that specific bureau.
And don’t forget, you are entitled to a free credit report, WITH SCORE, once per year from each bureau.