Mortgages, And Consumer Credit, Auto Loans

Category: Finance, Personal Finance.

As recent as a few years back, the term" Credit Score" was not very commonly used in our society.

Today, due to a, however number of factors such as increase Identity Theft and mass media marketing campaigns there are very few who are not aware of the term Credit Score. While there were who understood the term and its purpose, although realizing that, the mass majority there was a system out there that their credit, they did not have a term to stick to it. The goal of this article is to add understanding on the personal to the recognition of that term. It is used to represent the credit worthiness of an individual. A Credit Score is a number between 300 and 850 based on a statistical analysis of an individual s credit activity. How likely that the individual will pay his or her debts. Lending institutions, finance companies, such as banks, mortgage lenders, and credit card companies, use an individual s Credit Score to evaluate the potential risk posed by lending money to that individual.

A credit score is based on their credit report information which is typically sourced from credit bureaus and credit reference agencies, typically from the three major credit bureaus. Lenders use Credit Scores to determine who qualifies for a loan, at what interest rate the loan is issued, and what credit limits are determined. Credit scoring is not limited to banks, however. The use of credit scoring prior to granting credit is a trusted system throughout the industry. Organizations, such as mobile phone companies and government departments employ the same techniques. FICO is an acronym for Fair Isaac Corporation, the company that provides the most well- known and most widely used credit scoring system in the United States.

While there are many others, VantageScore and the, such as NextGen CE Score, The most widely known score in the United States is FICO, which is most widely used in the mortgage industry. The FICO score is calculated by applying statistical methods, developed by Fair Isaac, to information in one s credit file and is primarily used in the consumer banking and credit industry. No public information is available to determine what the scores mean in terms of statistics. FICO scores show how likely it is that a borrower will default. A separate score, is used to, BNI indicate likelihood of bankruptcy. Whether credit is denied or approved, what interest is charged, what income level and asset verification is required is all based on an individual s credit score. As stated, banks and other lending institutions use Credit Scores as factors in their lending decisions.

The FICO score actually uses slightly different scoring methods to rate a consumer s suitability for three different types of credit. Each reflecting the different credit risks of these various types of lending. Mortgages, and consumer credit, auto loans. It is not unusual for these scores to differ by as much 50 points or more for the same borrower. Although often times inaccurately referred to as" credit bureaus" , these agencies. There are three major credit reporting agencies in the United States. Equifax, also calculate their, Experian and TransUnion own credit scores.

These additional Credit Scoring Systems are numerous and are agency specific. These additional scores differ depending on what they are meant to predict, what statistical methods used to determine a score, and what information is used and how it is weighted. For example, Beacon 0, Beacon, Beacon 96, and Pinnacle scores are available only from Equifax. And, Fair Isaac Risk Score at Experian. Empirica, Precision Score, Empirica Auto 95, and Precision 03 are available only from TransUnion. These various Credit Scores are developed for the different agencies by Fair Isaac, each differs and are periodically updated to reflect current consumer repayment behavior habits.

In an effort to make credit scoring more consistent across the board, in 2006 the big three credit reporting agencies introduced Vantage Score. The NextGen Score is a scoring model designed for consumers. Vantage Score uses a different number range from the FICO score. A consumer s Vantage Score may differ from agency to agency, but the difference would be entirely due to differences in the information reported to the various agencies, not due to differences in scoring systems. It ranges from 501 to 990 and also assigns letter grades from A to F to specific ranges of scores. Since FICO is still widely used by lenders, the agencies continue to offer FICO scores( or their closest equivalent) as well.

Each version may use individual scorecards, and an individual potential borrower is typically compared with other previous borrowers. Most credit scores use a multiple- scorecard design. In other words, a borrower with one 30- day late payment will be scored against a population with some similar delinquency. The individual is then graded according to which variables indicate a risk within that group. A borrower with two 30- day late payments will be scored against a population with like credit faults. Nearly all large banks also build and use their own systems for credit scoring purposes, and are often times in conjunction with outside scoring formulas. The Federal Reserve Board s Regulation B, which implements the Equal Credit Opportunity Act, expressly prohibits a credit scoring system from considering any" prohibited basis" such as race, religion, color, national origin, or marital status, sex.

The systems used to generate credit scores are subject to federal regulations. It also stipulates that credit scoring systems must be" empirically derived" and" statistically sound" . The statement" credit score not high enough" is insufficient. In addition, if an adverse action, a denial of a credit application, is taken as a result of the credit score then the specific reasons for the denial must be provided to the individual denied. The reasons for denial must be specific; "too many delinquencies 60 days or greater" and such. Although the exact formulas for calculating credit scores are closely guarded secrets, the Fair Isaac Corporation has disclosed the following components and the approximate weighted contribution of each: 35% punctuality of payment in the past( 30 Days Past Due) 30% the amount of debt, expressed as the ratio of current revolving debt to total available revolving credit. 15% length of credit history. 10% types of credit used. 10% recent search for credit and/ or amount of credit obtained recently. Credit scores are designed to measure the risk of default by taking into account various factors in a person s financial history.

These percentages offer a limited guidance in understanding a credit score. It consists of multiple factors two being the oldest account open and the average length of time an account has been open. For example, the 10% of the score allocated to" types of credit used" is undefined, leaving consumers unaware what type of credit mix to pursue. "Length of credit history" is also a murky concept. Interestingly, although only 35% is attributed to punctuality, if a consumer is substantially late on numerous accounts, his score will fall far more than 35% . A FICO score generally has a max of 850 and a minimum of 30It exhibits a left- skewed distribution with a median around 72The performance of the scores is monitored and the scores are periodically aligned so that a lender normally does not need to be concerned about which score card was employed. Bankruptcies, and judgments affect, foreclosures scores substantially, but are not included in the very vague pie chart provided by Fair Isaac.

Because the three major credit agencies have their own, each of us, independent databases actually has three credit scores for any given scoring system. Many lenders will check an applicant s score from each bureau and use the median score to determine the applicant s credit worthiness. As these databases are independent of each other, they may contain entirely different data. As a result of the FACT Act( Fair and Accurate Credit Transactions Act) , each legal U. To guard against inaccurate information or fraud more often than yearly, one can request a report from a different credit reporting agencies available on the net. S. resident is entitled to one free copy of his or her credit report from each credit reporting agency once every twelve months. This information is available from a number of websites across the net that offer an free credit report and use of their services for 30 days.

The fee is nominal compared to the necessity of protecting your credit in today s highly technological society where identity theft is becoming more prevalent. After which, there is a monthly fee involved. In a time where identity theft and credit fraud in on the rise, the fee these firms charge seems like a small amount to pay to protect your credit and your good name. Here are a few examples of how: In September 2004, TXU( a Texas utility company) announced it would begin setting individualized electricity prices based on credit score. Having a good Credit Score is becoming more and more prevalent in our society. However, due to negative press and pressure from the Texas Public Utility Commission, the plan was not implemented. Recently, some of the agencies that generate credit scores have also been generating more specialized insurance scores, which insurance companies then use to rate the quality of potential customers.

Credit scores are often used in determining prices for auto and homeowner insurance. These scores are unavailable to consumers. The fact is that your Credit Score is important. Many employers reserve the right to do a credit check of job applicants, in the same manner they reserve the right to drug test potential employees. Rebuild- Credit. us is a sight committed to providing consumers with quality information concerning credit, how to get it, and how to maintain a quality credit score. It is recommended you take the time to visit them and read through the numerous articles and reports there.