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There are 5 parts to your credit scores and each one is weighted differently. The exact formula for credit score calculations is guarded as heavily as the formula for Coca-Cola or the Colonel’s Secret Recipe, but FICO does give us some general guidelines.

1. Payment history – about 35% of your score. In the simplest terms, every time an on-time payment is made, a hash mark is made in the good column; every time a late payment is recorded, a hash mark is made in the bad column. When the number of marks in the good column makes up for the ones in the bad column, you will then see an increase in your credit score. I have literally seen credit scores go down by 60 or more points from one month to the next because a late payment was made on a credit card. In the mortgage industry, there is nothing worse than making a mortgage payment late.
2. How much you owe – about 30% of your score. The scoring looks for the ratio between the available credit and how high the credit balance is. Generally a ratio of 50% or lower is best.
3. Length of credit history – about 15% of your score. Generally the longer you’ve had to build your credit the better. However short credit history can provide good scores if there have not been any late payments.
4. New credit accounts – about 10% of your score. Demonstrating the ability for other lenders to extend credit is a sign of credit worthiness and it can help bump scores. Another area affected is the number of inquiries on your report. Generally if you are shopping for a particular type of loan, such as a mortgage, the credit bureaus distinguish between those and multiple, random types of credit. Shopping for a mortgage within a certain time frame, usually within a month, doesn’t damage your score as long as it’s a reasonable number of inquiries.
5. Other factors – about 10% of your score. Bureaus look for other factors such as the mix of credit available to you, or if you’ve registered with the National Opt Out program. Each bureau rates their miscellaneous factors differently.

So if there is a general percentage attributed to each factor, why do credit scores range from bureau to bureau? The main factor is because not every creditor on your credit report provides their information to all three bureaus. Usually mortgage lenders report to all three bureaus, but let’s say that you have an auto loan through a dealer that personally finances the vehicle. That auto dealer may only report to one of the bureaus, not all three. If so, your credit at the bureau the dealer reports to will either be increased or decreased, depending on your payment history.

There is a new FICO model coming out called FICO08.  It's supposed to help distinguish between the consumer who has a minor ding on their credit vs someone who habitually doesn't pay their bills.  As soon as it's released, I'll let you know more about it. 

Enjoy reading!  Please call me at 245-9855 or email at info@loansbyjolynn.com should you have questions! 

There are many times when a client comes to me and has no idea of what information is on their credit report. The time to find out about credit information is months before wanting to purchase a house, not weeks.

First of all, a definition of credit is to believe; put confidence in; trust; have faith in.  Someone giving you some money or services before payment is received is believing or trusting that you will pay back the money they have given you.  A credit report is a documented account of how well you paid back the money or service that was given to you.

First, we have the Fair Isaacs Corporation (FICO) to thank (or not to thank in some instances) for developing the scoring model. They developed the model in 1956 to give credit decision makers a number to base a lending decision upon instead of arbitrary data that could vary from one consumer to another. This was meant to level the credit field and not to discriminate upon age, sex, or race. From their website, Fair Isaacs claims that:

Fair Isaac’s FICO scores are the most used credit bureau scores in the world. About 65% of the world’s credit cards are managed using Fair Isaac adaptive control systems. Fair Isaac analytics are used in three out of four US mortgage originations. Their scoring mechanism is used by more than 400 personal and commercial lines insurers in North America and Europe, including 9 of the top 10 US personal lines insurers.

As you can see, qualifying for everything from credit cards, cars, mortgages, insurance rates and in some cases employment are based on data found in your credit report so it is critical that the information contained in your report is accurate.

There are three major credit reporting bureaus, Experian, Trans Union and Equifax. These three separate and distinct reporting agencies use the data reported to them by your creditors, plug that data into the scoring model developed by Fair Isaacs and then issues a score. The score can be a no score or range from 350 to 850. The scores will vary between the three bureaus because not all creditors report your credit to all three bureaus. Some may report to only one, some may report to just two. To whom they report your credit history is based on the policy of your creditor. However, the credit bureaus are regulated by the Federal Trade Commission and the Fair Credit Reporting Act.

When your score is produced, the higher the score is the better. Lenders treat the score as a snapshot of the likelihood you will repay your mortgage loan to them. They figure if you are diligent in repaying your current creditors, more than likely you will repay them as well.

Due to changes in the Fair Credit Reporting Act, every consumer is entitled to a free copy of their credit report each year. You can obtain a copy by logging on to www.annualcreditreport.com.

One very frequently asked question I get is "Jolynn I pulled my credit score on line and I had a much higher credit score that what you told me."  Or, "Jolynn I purchased a _____ (usually a car) a few months ago and they said my credit score was higher."  There are a variety of reasons for this.  First, many of the companies that give you a score on-line do not give a score based on the FICO model used in the mortgage industry.  Second, a credit score can vary from industry to industry.  For example, if you were to go buy a vehicle, an automotive lender would be more interested in how you repaid your last car loan, therefore, their credit scores are weighted more towards their industry.  Same goes for the mortgage industry.  And lastly, there are the 3 credit bureaus, but there are MANY providers of credit reports.  Each of those providers may give a slightly different score.

Hope you enjoy reading, let me know if you have questions!

I wanted to pass on some information that I've come to learn over the past few weeks.  Come January 2008, mortgage insurance underwriting is changing.  For those that are unaware, mortgage insurance (MI) is an insurance policy required by the lender for those that put less than 20% down on the purchase of a home, or for those that refinance at a greater than 80% loan to value.  This insurance policy protects the lender in case the borrower should default on the loan.  See my page regarding PMI here.

In January of 2007 we saw MI rates change to be credit score driven.  In January 2008 MI is becoming even more strict and requiring the borrower have a minimum of a 620 credit score on all loans with less than 5% down.  This means that even though the borrower may qualify for the loan, they may still not qualify for the loan because mortgage insurance may not be available based on credit scores. 

This does not affect government loans such as FHA, VA, Native American and USDA.  The only one of those that requires MI is FHA, and being it is government insured, the government provides the MI.

What does this mean for everyone involved?  Good credit is becoming more and more important!!  In the following days I'll be blogging on credit scores in general, how to improve credit scores and how to establish credit.  In the meantime, stay warm, safe and out of the cold!