All About Credit Scores
All About FICO®
Low Credit Scoring
Mortgages and FICO® Scores
All About Credit Scores
A credit score is an indicator of how likely you are to default on a loan or credit card in the next 24 months. This information is used by credit grantors when they evaluate your credit for approval. Your FICO® score is based solely on information in your credit file maintained by the credit reporting agencies. Other scores may be based on a combination of credit information and other information that you supply on your credit application.
The way you have handled credit in the past may indicate how you will manage credit in the future. Credit scores cannot predict with certainty how you will manage credit, but they do provide an objective estimate of how likely you are to repay on time and according to terms
How Are Scores Calculated?
Your credit report is the basis of your FICO® score. The report details your credit history as it has been reported to the credit reporting agency by lenders who have extended credit to you, by court records and by you. The FICO score analyzes information from the trade line, inquiry, public record and collection sections of your credit report.
A FICO score evaluates five main categories of information in your credit report, and compares this information to the patterns in hundreds of thousands of past credit reports. These five categories are, in order of importance:
Payment history — what is your track record? 35 % of the score
Risk predictors here:
* Severity – how bad are the delinquencies?
* Recency – how recent are they?
* Frequency – how many times did it occur?
Amounts owed — how much is too much? 30% of the score
Risk predictors here:
* Large outstanding balances
* The ratio of balances to credit limits
Length of credit history — how established is yours? 15% of the score
Risk predictors here: Age of the trade lines - (the age of the oldest account, the average age of accounts, or both).
New credit — are you taking on more debt? 10% of the score
Risk predictors here: Number of inquiries and new account openings
Types of credit in use — is it a healthy mix? 10% of the score
Risk predictors here: Number of trade lines reported for each type: bankcards, retail, department store cards, installment loans, etc.
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All About FICO®
Your credit score is determined by use of a very complex algorithm applying weighted values to many data factors. The length of your credit history, the number and types of accounts you have on record, how much is owed compared to your total credit line, and how timely the payments have been made are the most important factors. For years, the FICO® scoring model from Fair, Isaac & Co. has served as the standard in credit risk scoring.
You, the consumer, can improve your FICO® score by disputing credit report records on your own, provided you know the protocol. Over time, with the practice of responsible money management, you can further improve your credit score.
If you don't have time, or don't know where to start, contact the professionals at Innovative Credit Consultants for assistance. We know the laws inside-and-out and can get your inaccuracies, as well as certain other items, removed. By law, the credit bureaus must provide adequate proof of their records or remove disputed items. We hold the credit bureaus legally responsible for what they list on your credit report. This will improve your credit score.
We realize that all things being equal, you'll do business with those you know, like and trust. We have built our business one relationship at a time. Get to know us. You'll like us and you'll trust us. Contact the professional credit repair specialists at Innovative Credit Consultants today.
FICO® Scores In Action
When you apply for credit – whether for a credit card, a car loan, or a mortgage – lenders want to know
what risks they are taking by loaning money to you.
• FICO® scores are the credit scores most lenders use to determine that credit risk.
• You have three FICO® scores, one for each of the three credit bureaus – Experian, TransUnion, and Equifax. Each score is based on information the credit bureau keeps on file about you. As this information changes, your credit scores tend to change as well.
• Your 3 FICO® scores affect both how much and what loan terms (interest rate, etc.) lenders will offer you at any given time.
• Taking steps to improve your FICO® scores can help you qualify for better rates from lenders.
Savings Example
The higher your FICO® scores, the less you pay to buy on credit – no matter whether you’re getting a home loan, cell phone, a car loan, or signing up for credit cards. For example, on a $216,000 30-year, fixed-rate mortgage:
| If Your FICO Score Is |
Your Interest Rate Is |
760-850
700-759
680-699
660-679
640-659
620-639 |
6.92%
6.14%
6.32%
6.53%
6.96%
7.51%
|
As you can see in the example above using today’s national rates, a person with FICO scores of 760 or better will pay $302 less per month for a $216,000 30-year, fixed-rate mortgage than a person with FICO scores below 620 – that’s a savings of nearly $3,624 a year. You can see that it pays – literally – to improve your FICO scores.
How to Get Started
The first step to improving your FICO scores is reviewing your current FICO scores and credit reports. FICO Deluxe offers instant online access to all three of your current FICO scores and credit reports. FICO Deluxe also includes an explanation of the positive and negative factors affecting your score and provides access to the FICO score simulator, which helps you decide the best ways to improve your FICO scores over time.
If your FICO scores are less than the median FICO score of 723, then the next step is learning how to make your FICO scores better by managing your personal credit risk and repairing credit over time.
Contact us today with any questions you may have by phone at 800-666-6050 (967-2673) or by email at info@icreditinc.com
Credit Scoring In Action
Credit scoring is a statistical method that lenders use to quickly and objectively assess the credit risk of a loan applicant. In short, it is a current picture of your credit. The score is a number that rates the likelihood that you will pay back a loan. Scores range from 350 (high risk) to 950 (low risk). There are a few types of credit scores; the most widely used are FICO scores, which were developed by Fair Isaac & Company, Inc. for each of the credit reporting agencies.
Credit scores only consider the information contained in your credit profile. Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score. They do not consider your income, savings, down payment amount or demographic factors like gender, race, nationality or marital status. Different portions of your credit file are given different weights. They are:
35% - Previous credit performance (specific to your payment history)
30% - Current level of indebtedness (current balance compared to high credit)
15% - Time credit has been in use (opening date)
15% - Types of credit available (installment loans, revolving and debit accounts)
5% - Pursuit of new credit (number of inquiries)
The most important factor for a good credit score is paying your bills on time. Even if the debt you owe is a small amount, it is crucial that you make payments on time. In addition, you may want to keep balances low on credit cards and other "revolving credit;" apply for and open new credit accounts only as needed; and pay off debt rather than moving it around. Also don't close unused cards as a short-term strategy to raise your score. Owing the same amount but having fewer open credit cards may lower your score.
Recent changes minimize the negative effects that rate shopping can have on a mortgage applicant. If there is a consumer originated inquiry within the past 365 days from mortgage or auto related industries, these inquiries are ignored for scoring purposes for the first 30 calendar days; then, multiple inquiries within the next 14 days are counted as one. Each inquiry will still appear on the credit report.
Every score is accompanied by a maximum of four reason codes. Reason codes identify the most significant reason that you did not score higher. The reason codes can help a lender describe the reasons for higher than expected rates or loan denial. Scores are not part of the credit profile and are not covered by the Fair Credit Reporting Act.
Your credit report must contain at least one account that has been open for six months or greater, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.
Contact us today with any questions you may have by phone at 800-666-6050 (967-2673) or by email at info@icreditinc.com
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Low Credit Scoring
Your FICO® credit score is your credit rating. You have three FICO® credit scores, one from each of the three major credit bureaus. The FICO® credit score system assigns points to factors that help predict who is likely to repay a debt, and make the payments when due. The FICO® credit score ranges from the mid 300's to the mid 800's, with higher credit scores being better. The median credit score in the U.S. is 729.
You may be asking, "What goes into my credit score?" And whether you need clean credit in order to have a good credit score.
The following areas will weigh positively on your credit score:
· Records showing all payments were on time
· Long-established accounts
* An insufficient credit history may have a negative effect on your credit score, but that can be offset by other factors, such as timely payments and low balances
* The following areas will weigh negatively on your credit score
· Reported delinquencies, especially if severe and recent
· Revolving bank accounts - lack of accounts, or too many accounts
· Too many credit card accounts with balances
· Loans from finance companies
· Too many inquiries from potential credit grantors
· Too many new accounts
· High proportion of balance to credit limit
· No recent (non-mortgage) account balance information
Keep in mind...
· Your credit score is likely to go down by a few points with each inquiry by potential credit grantors. (Inquiries by YOU do not affect YOUR score.)
· Your credit score will change with the age, balance, and status of your credit accounts.
· Lenders use different or custom scoring systems, so the numbers will vary, and may be meaningless to you.
· Some companies do not use credit scores.
Contact us today with any questions you may have by phone at 800-666-6050 (967-2673) or by email at info@icreditinc.com
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Mortgages and FICO® Scores
Until a few years ago, credit scoring had little to do with getting your mortgage. Loan processors and underwriters would make subjective decisions based on past payment history in determining the credit worthiness of a borrower.
After lenders studied the definite relationship between credit scoring and mortgage delinquencies, things began to change. Clearly half of the borrowers with FICO® scores below 550 became ninety days delinquent at least once during their mortgage term. On the other hand, only one in every 5,000 borrowers with FICO® scores above eight hundred became delinquent.
Loan processors will typically request reports and credit risk scores from at least two of the three major credit bureaus. The better your reports, the better you'll score, and the easier it will be to get a mortgage loan with good rates and terms.
Never apply for a loan without knowing what each of the three bureaus will report on you. Remember, FICO® scores play an important role in mortgage underwritinge. If necessary, do credit repair before submitting any applications.
The higher your credit score, the less you’ll pay for a mortgage. For example, take the cost of a $200,000, 30-year, fixed-rate mortgage. Here’s a snapshot of what borrowers with varying credit scores nationwide were charged, on average, for this loan on Aug. 5: The difference in cost between the highest credit score and the lowest score eligible for that loan is a whopping $478 a month, or $5736 a year-which adds up to $172,221 over the life of the loan. To find out what different loans will cost you-depending on your credit score and what state you live in-go to myfico.com and use the loan calculator. Credit Score; APR; Monthly Payment; Total Interest Paid Over 30 Years
720-850 - 5.793% - $1173 - $222,141
700-719 - 5.918% - $1189 - $227,888
675-699 - 6.456% - $1258 - $253,008
620-674 - 7.606% - $1413 - $308,671
560-619 - 8.531% - $1542 - $355,200
500-559 - 9.289% - $1651 - $394,362
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9 Ways To Salvage An Ailing Credit Score
Today's Mortgage Costs Are Dirt Cheap - If You've Got The Right FICO Rating
By Luke Mullins
Without even contacting a credit bureau, Jeana Reed has a pretty good sense of what her credit score is. "It's probably the worst they've ever seen," says Reed, a 51-year-old Texan. Like many Americans, Reed's current credit headaches can be traced to a hospital stay. After her husband blew out his knee playing softball, complications from the injury kept him out of work longer than expected, which forced the couple to use credit cards to pay off medical bills. A job loss and a subprime mortgage refinancing later, the Reeds find themselves among the scores of Americans struggling to rebuild a soiled credit history. "I just want to get back on track," Reed says. "I'm not a deadbeat person."
Poor credit has always been a drag on household finances, as unpaid bills and late payments can lower a consumer's FICO score-the 300-to-850-point gauge lenders use to evaluate the risk that a borrower will default. Lower FICO scores can trigger higher interest rates on everything from credit cards to car loans. But recently, they've become more important to the real estate market. Just a few years ago, Fannie Mae and Freddie Mac used FICO scores primarily in deciding whether to approve a loan application. "That all changed as the market started to deteriorate and [Fannie and Freddie] were looking to fine-tune their mortgage pricing from a risk-based perspective," says Rick Allen, director of strategic initiatives for Mortgage Marvel, an online mortgage shopping website. Today, the mortgage finance giants use credit scores to determine mortgage costs too, jacking up fees on consumers with lower credit scores to compensate for their higher risk of default.
For would-be home buyers, this change has had powerful ramifications. With home prices declining and 30-year, fixed mortgage rates hitting near-record lows of less than 5 percent, the real estate market is offering plenty of incentives to jump in. But only borrowers who meet today's tighter credit standards-which include a FICO score of around 720, a down payment of at least 3.5 percent, and documented income verification-can get the lowest cost of financing. For example, a lender operating under Fannie Mae's pricing structure would charge a borrower who has a FICO score of 695 and a 15 percent down payment $3,000 in extra fees on a $300,000 mortgage. A borrower with a 720 FICO score, meanwhile, wouldn't pay any of those fees on the same loan. "FICOs are everything," says Chris Freemott, president of mortgage lender All American Mortgage in Naperville, Ill.
But whether you are deep in the weeds or just looking to get the best deal on a home loan, it's never too late to improve your credit. To help consumers reduce their mortgage financing costs, U.S. News gleaned tips from a handful of experts on boosting your credit score.
1. Get your credit report: The first step for improving your credit profile is to find out where your credit currently stands. Three main credit reporting bureaus - TransUnion, Equifax, and Experian - collect and compile payment information on individuals from tens of thousands of credit grantors, such as banks, credit card issuers, and retailers. "If you are about to buy a house ... then I want you to get all three credit reports," says Gail Cunningham of the National Foundation for Credit Counseling. "I never want to end up sitting across the desk from someone who knows more about me than I do." By law, consumers are entitled to one free credit report from each of these bureaus during any 12-month period. The free reports are available at AnnualCreditReport.com.
2. Get your FICO score: The FICO company created the formula that credit bureaus use to generate a FICO score. Every consumer's FICO scores are calculated from data from each of the three main credit bureaus. The scores take into account your payment history, the amounts you owe, your length of credit history, your new credit, and the types of credit you have used, says Shon Dellinger, vice president of myFICO.com for FICO. After getting your credit reports, Cunningham recommends obtaining your credit scores. A single FICO score can be purchased at myFICO.com for about $16. (FICO scores from Experian are no longer available through myFICO.com. Instead, Experian scores can be obtained through Experian.com or AnnualCreditReport.com.)
3. Study and check: Everyone - including the major credit bureaus - makes mistakes. But when it comes to credit scores, it's the consumer who pays for such screw-ups through higher interest rates. As a result, consumers need to ensure that everything included in their credit history is accurate by thoroughly examining their credit reports. "If you are a junior and your father is a senior who's got rotten credit habits, make sure that your report is distinguished from his," Cunningham says. Since a mistake may appear on one credit report but not another, it's best to examine all three of your reports. If you discover any incorrect material, contact the appropriate credit bureau for information about filing a dispute.
4. Pay up, then ask forgiveness: In addition to correcting inaccuracies, it's important to take care of all unpaid bills that show up on a credit report. (Keep in mind, however, that paying off a collection account doesn't remove the stain altogether-it will remain on your credit report for seven years.) But if, for example, you find that you've inadvertently missed a payment on a credit card that you've paid on time for years, it's worth calling the company to see if you can work something out, says Keith Gumbinger of financial publisher HSH Associates. "If it's a hiccup in a long pattern of good payments, you might be able to have them clear that up," he says.
5. Good habits: Correcting mistakes and paying off old bills are important steps toward cleaning up past blemishes, but in order to build a strong credit profile, consumers will have to develop healthy credit habits going forward. After all, the best way to boost your credit score is to pay your bills on time each month. "Credit scoring is pretty complex, but what you need to do as an individual isn't very complicated to get the scores you need," says Rod Griffin, director of public education for Experian. "No matter what scoring system you look at, the thing that will most affect scores negatively is being late on your payments. So pay your bills on time." If something comes up to force you to be late on a payment, contact the creditor beforehand, alert them to the problem, and see if they might be willing to work out an arrangement.
6. Low balances: Credit scoring systems also look closely at consumers' so-called utilization rates, which compare outstanding balances to total available credit, Griffin says. "The lower your balances are as compared to your limits, the better ... because it shows that you aren't overusing the credit you have available," he says. "It also shows that you make cautious and wise decisions with regard to how you use your credit." So paying down balances on credit cards can improve your FICO score.
7. Get credit only as needed: Having credit cards can help raise your credit score, as long as they are paid on time. But it's important not to go overboard. Opening a slew of new credit lines at once can drag down your credit score, says Dellinger: "The classic example there is opening a whole bunch of store cards." So make sure that you open new credit lines only when necessary.
8. Ditch the doctors: There are plenty of outfits that promise to restore your credit to tiptop condition-for a fee. But Cunningham warns against turning to these "credit doctors." "Anybody who says they can clean up your credit report cannot do one thing that you cannot do for yourself," she says. "We have people come to us all the time that have spent hundreds of dollars and end up very disappointed." Consumers seeking specific advice on rebuilding their credit can locate a certified credit counselor in their area by contacting the National Foundation for Credit Counseling, Cunningham says.
9. Credit Counseling: When a consumer with troubled credit arrives at one of the NFCC's nearly 850 locations across the country, a trained credit counselor will review the person's recent pay stubs, bills, and collection letters before explaining how to "priority pay" monthly obligations: paying off living expenses first, then secured debt-such as a car payment-and then using whatever cash is left over to service the remaining debt. The counselor may determine that a debt management program is the best option to help the consumer get back on track. "And that is where the debt counselor negotiates with the creditor for a lower monthly payment, lower interest, stops late fees, and stops over-limit fees with the goal being that the consumer can continue to service his living expenses in full, while still addressing debt reduction," Cunningham says.
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FICO Credit Score - How the FICO Credit Score is Composed
The Pieces of Your FICO Credit Score
By Justin Pritchard
One of the most commonly used scoring tools is the FICO credit score. It's important to
understand how the FICO credit score is determined. There are just a few pieces to the puzzle, and focusing on these pieces can help you improve your FICO credit score.
Where Does the FICO Credit Score Come From
Your FICO credit score is calculated by the Fair Isaac Corporation. Fair Isaac looks at information in your credit report, and crunches the data using a proprietary formula.
Note that your FICO credit score is only as good as the information that Fair Isaac has available. If there is incorrect or out-of-date information, it will affect your FICO credit score.
How the FICO Credit Score is Composed
To create the FICO credit score, Fair Isaac uses a few bits of information:
FICO Credit Score Components
* 35% Payment History
* 30% Amounts Owed
* 15% Length of Credit
* 10% New Credit
* 10% Type of Credit
If you're trying to improve your FICO credit score, you may need to focus on one or more of the components above. The next few pages help you take actions to improve each of these areas.
There's More to You Than Your FICO Credit Score
Before you break your back trying to manage your FICO credit score, remember that lenders may look at other factors besides just your FICO credit score.
For example, you may be able to show the lender that you just got a better paying job that will allow you to cover all your debt payments - this is not something that will appear in your FICO credit score.
Now that you know all about how the FICO credit score works, let's look at ways to improve credit scores. The previous page showed you the components of your credit score, and this page shows you how to focus on some of those components.
Improve Credit Scores - Payment History Category
* Pay on time, no magic secret here
* If you can't pay on time, notify your lender that you need to work something out
* Get current on past due accounts
Improve Credit Scores - Amounts Owed Category
* Keep low balances relative to your credit limit - 35% or lower is best.
* Don't open new accounts just to lower your used credit capacity - having too much capacity is a risk too
Improve Credit Scores - Length of Credit Category
* Consider keeping old accounts open if you've been a good borrower
* Start building credit as soon as possible
Improve Credit Scores - New Credit Category
* When shopping for new credit, keep it all within a short time frame such as 14 days or less
* Borrowers with a bad history can improve credit scores by opening a new account and managing it responsibly
Improve Credit Scores - Types of Credit Category
* Installment debt (where you pay fixed monthly installments to eliminate the debt) is "better" than revolving debt (open-ended credit card debt)
* Certain finance company debts (like buying a product with retailer financing) can lower your score
* A variety of loan types is helpful. They'll know you're a seasoned borrower if you have a mortgage, an auto loan, a few credit cards, and a student loan. If all you have is credit card debt, you'll appear inexperienced
In general, you need to know that it takes time and discipline to improve credit scores. The above rules should become second nature to you. Finally, don't fall for any promises to improve credit scores overnight (or for a fee). In rare circumstances, you can get legitimate errors removed from your credit reports more quickly than normal - but not true information about mistakes you've made.
The only person who can make a large dent in your credit score is you.
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The New Math of FICO Credit Scores
Those with small blemishes on their record should benefit from the FICO 08 scoring change, while high-risk borrowers and those who "piggyback" are the likely losers.
By Amy Hoak
Even the most responsible borrowers slip up sometimes.
Maybe a utility bill went unpaid after you moved and the missed payment went into collections. Or perhaps there are unpaid library fines or parking tickets in collections that are hanging onto your credit history and affecting your FICO credit score, which is widely used.
With the newest version of the FICO credit-scoring system, however, minor delinquencies are now overlooked in calculating creditworthiness.
Under the updated scoring model, called FICO 08, small missed payments lingering in collections with original amounts of $100 or less will no longer do damage to your credit score.
Consumers also are less likely to be penalized for any single delinquency if it occurred two or more years ago -- and if their credit history is otherwise unblemished, says FICO (formerly Fair Isaac), which developed the FICO scoring system.
"There's more flexibility with missing a payment," said Careen Foster, the director of global scoring product management for FICO. "If you have a more habitual pattern of paying accounts late . . . you're more likely to get penalized for that."
If a consumer's credit usage is high, that will be more likely to hurt his or her score with FICO 08. But getting close to your credit-card limits -- even if you always pay on time -- is penalized in some way in every FICO score, not only the recent edition, Foster said.
The new system has been available at all three credit bureaus -- Experian, TransUnion and Equifax -- since last month.
The changes were made to provide lenders with a better risk assessment of borrowers, said John Ulzheimer, the president of consumer education for Credit.com, a consumer education and advocacy site. FICO decided that one small library fine didn't really predict whether a consumer was likely to default, for example.
With the changes, individuals who pose a low credit risk will probably see their scores rise a bit, and those who are high risk could see their scores drop, he adds.
FICO 08 also addresses "piggybacking," a practice used by credit-repair companies to help people improve their scores, Ulzheimer said. In piggybacking, an individual pays to become an authorized user on a stranger's account. The account holder gets paid for allowing the person to be associated with the account, and the new authorized user is able to improve his or her credit score.
"It was a practice to . . . misrepresent what your credit looks like to your bank," Foster said.
FICO 08 aims to single out individuals who are named as authorized sources through deceptive means, Ulzheimer said. Those people won't see their credit scores rise as a result. But the scores of legitimate authorized users will be treated as they always have been.
Not all lenders use the model
Borrowers shouldn't expect their credit to be graded by this new scale on every loan application. Not all lenders have adopted the new model, though more than 400 lenders are using or testing FICO 08, the company said.
In a statement, Equifax said, "Currently, many lenders and businesses are validating the new score within their systems, and adoption will vary by financial institution based on business requirements and market need."
Many credit-card companies, auto lenders, regional banks and credit unions may have already adopted FICO 08, Ulzheimer said. But for mortgages, lenders doing traditional conforming loans backed by Freddie Mac and Fannie Mae likely haven't made the move yet, he said. That's because they're waiting for Freddie and Fannie to approve its use. Freddie Mac and Fannie Mae "are essentially the lender . . . they're the ones that set the underwriting criteria," he said.
Ulzheimer said he expects Freddie and Fannie to adopt FICO 08 by the end of the year. Fannie declined to comment on FICO 08; Freddie wasn't able to provide a comment prior to publication.
Be proactive about your credit
While FICO 08 will help consumers' credit scores in some cases, people still should take steps to improve their credit. Granted, it's impossible for consumers to calculate their FICO scores themselves, said Rodney Anderson, of Rodney Anderson Lending Services in Plano, Texas.
"It's almost like the Coca-Cola formula. No one has access to the Coca-Cola formula, no one has access to the FICO formula," he said.
But by being proactive, you can start to work toward a higher score, something that will serve you well every time you apply for a loan.
Some suggestions:
* Monitor your credit reports and correct errors. Don't just look for negative events on your record; also examine your credit limits to make sure they're accurate. Credit limits that appear lower on the report than they actually are have the potential to hurt your score, Anderson said.
* Pay bills on time and keep card balances low. Your payment history, and the amount you owe on your accounts as a ratio of the amount of credit you have access to, are important components of your score, Foster said. FICO 08 is more sensitive to high credit usage, and consumers may see a lower score if their reported balance on one or more cards is near the account's limit.
* Take on new credit only when you need it. Some credit cards come with great offers, including a percentage off your bill if you sign up at the cash register. If you accept, make sure you're getting a big enough benefit to make it worthwhile -- taking on additional credit could end up dinging your score, Foster said.
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