< Read Another Article Your Credit & the Credit Bureau How's your credit? Has it been tainted by some other persons indiscretions and somehow shows up on your report? What is a credit score? How is it calculated? How can you repair it? This is only a short list of many questions that are asked every day when consumers begin shopping for a home. Realtors, lenders and you ask these questions. Let's see if we can answer a few. Credit scoring began in the 1950's but became more widely available in the 1980's. There are three national credit programs at three bureaus: BEACON at Equifax (formerly CBI); EMPIRICA at Trans Union; and The Experian, the Fair, Isaac Model at Experian (formerly TRW). These three big credit scoring company's goals is to score statistically evaluate and determine how likely a borrower is to pay back a loan. The score is based on available data accumulated based on the borrower's history. The score defines the degree of risk a borrower represents to a lender. The score does not reflect directly a person's income or assets. However, they are independently considered along with bank accounts and can ultimately be what is known in the lending industry as compensating factors. As an example, a compensating factor may be a long proven history of one's savings ability even though they have been 30 days late on a payment. Scores range from approximately 400 to 900, the higher the score the better. These scores are referred to as FICO scores, which is an acronym for Fair Isaac COmpany. Who is Isaac anyway? And who says he's fair? Well, it's not just Isaac. And it's not the Isaac in the Bible and no one says it is or isn't fair either. But, it is Bill Fair and Earl Isaac who founded the Fair Isaac Company in 1956. Bill Fair was a mathematician and Earl Isaac was an engineer. Together they revolutionized the way the financial services industry extended credit. It's important to understand that Fair Isaac does not change your credit score or keep a record of it. They simply provide the lenders with the analytical tools and solutions to determine credit scores, manage their respective databases and thereby make their credit decisions. Each of the above listed companies subscribes to the Fair Isaac Company. Then, each of them come up with their own version of a person's FICO score. When these scores are calculated they are provided to banks, credit unions, credit card companies and the like. Some banks subscribe to one company for their credit information, i.e., Equifax while others will subscribe to all three. Still yet, other lenders will pull a "tri-merge" from a smaller independent company who literally verifies and merges the information from all three repositories onto one report. This "tri-merge report" is the most common among mortgage lenders because the loan amount is so large. Lenders want to make sure they have all the data they can possibly have at the time they make their decision. They will even pull an update report just prior to the funding of a mortgage loan to make sure there is no immediate recently reported negative information. This all seems daunting enough and we will explore the actual reports in the future but let's look now to the types of credit information an underwriter uses in making your approval. These include the following and are directly from Fair Isaac: Payment history Public record and collection items Severity, recent and frequency 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 last 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 In order to come up with the most predictive degree of future risk, Fair Isaac studies and calculates into their equation a very large number of histories of mortgage borrowers and determines items or combinations of items on a credit report that analytically define the degree of credit risk. Credit Bureau's and lenders always make sure to disclose that their underwriting decisions do not use race, color, religion, national origin, sex, marital status, or age as predictive characteristics. Occupation and length of time in present home are also not used in the scores. Also, any information that is not present in a credit file is not used is creating a credit score. < Read Another Article

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