When you receive your Credit Report from your mortgage lender or bank, take a closer look at the information codes and ask what they mean. Below are some basic pointers about the factors used and how they are viewed by lenders. 
What Is Credit Scoring?
Credit scoring is the process of evaluating collected credit account and payment history data on an individual in order to objectively determine that persons credit worthiness. The scores, sometimes referred to as FICO scores (invented by the Fair Isaac Credit Organization) are calculated at the very instant that the credit report is generated, and therefore these scores can change from one credit report to the next even within a very short period of time. Scores generally range from 350 - 850 and are intended to inform the creditor of the level of risk they would take by offering credit to that individual: the higher the score the lower the risk level. The credit report is a "snapshot" of the persons credit file at that particular time. By the way, 420 is NOT a good score!
Who Collects the Data?
The three primary collectors of payment history data are: Experian, TransUnion, and Equifax; known as the "Bureaus" or "Repositories". Creditors contract with the bureaus of their choice in order to send them the data. The bureaus analyze data on millions of consumers to determine payment patterns, which help predict the likelihood that the individual will make their future payments on time.
Why 3 different Scores?
Each bureau utilizes its own computer software "scoring model" to crunch the data and calculate a score, one reason for the difference in score between bureaus. Furthermore, the details of the data from a single creditor often differ from one bureau to the next, another reason for the difference in score between bureaus. To determine WHY the score is not higher simply look at the Reason Codes listed under the score. These reasons are listed in order of impact from top to bottom and indicate the primary calculating factors. Factors not listed are affecting the score, but to a lesser degree. Use these reason codes to decipher how to raise your scores.
What Data do the Scoring Models evaluate?
The scoring models evaluate all of the information in the individuals credit file, both good and bad. The scoring models DO NOT consider: income, employment, race, gender, nationality, address or interest rate on accounts when calculating the score.
Breakdown of Scoring Calculation:
*Past Payment History (35%)
*Outstanding Debt Utilization (30%)
*Age of accounts Established (15%)
*Type of Credit Being Used (10%)
*Pursuit of New Credit / Inquiries (10%)
Points of Interest on Calculation breakdown:
*Severity, recentcy, and frequency of delinquencies noted on trade lines are primary indicators of risk.
*Recent late payments and other "derogatories" are more indicative of future default than are older, more isolated occurrences. Derogs begin to lose potency after 24 months. The scoring models are looking for recent patterns, GOOD payment patterns are considered when scoring. IE: Someone who has missed just a couple of payments in the last 2 months would be a higher risk than someone with much older more severe delinquency.
*The number of sizable outstanding balances is predictive of risk, as is the proportion of those balances relative to credit limits. 30% or less of credit limit is optimal balance amount to carry.
*Look at the "Date Opened" column for an indication of how long accounts have been established. Short history could indicate some risk, but only if other negative factors exist.
*The number of inquiries and new account openings in the last year and the length of time since the most recent inquiry is potential indicators for caution. The balance of the file must be considered.
*Scan for the types of tradelines on the report. Finance company accounts will negatively impact the score more heavily than bankcards, store cards, or auto loans. Credit through Finance Companies indicates potential risk due to consumer's inability to obtain credit from less expensive sources.
How do Inquiries Affect the Scores?
All credit reporting sources have Subscriber Codes which indicate to the bureaus the purpose of the credit information request, i.e., mortgage loan, auto loan, credit card account, consumer inquiry, etc.
Consumer Inquiries from sources such as: http://www.annualcreditreport.com/, http://www.myfico.com/, etc. DO NOT affect scores.
Inquiries for obtaining credit can affect scores from 2 - 50 points depending on other variables in the file. Refer to reason codes to assess whether inquiries have affected score(s).
Multiple inquiries, regardless of quantity, for Mortgage loans, made within a 30 day period are counted as only 1 inquiry. This is called the De-Duping Period.
Furthermore, any Mortgage inquiry made within 30 days of the last lender inquiry will be shown on the report but will not adversely affect the score.
Promotional or Employment inquiries do not affect scores.
How can an individual improve their Scores?
Credit scores will improve as an individuals' overall credit picture improves, however this process takes time.
Pay down revolving account balances to below 30% of the High Credit Limit.
DO NOT close accounts, unless the reason codes indicate that there are too many revolving accounts and all of these have little or no balance. Closing well-seasoned accounts is not the best idea.
DO NOT consolidate debt onto a few cards and close other accounts. Rather, spread the balance among cards to achieve 30% or less balance / credit ratio on as many cards as possible.
DO NOT pursue any type of Consumer Credit Counseling as this can wreak havoc on the credit file and lenders often require such relationships be terminated prior to any approval.
What about Rapid Re-Score?
Rapid Re-Score is a service offered by the bureaus, for quickly correcting erroneous information in the individuals credit file. The bureaus require a letter from the creditor which states exactly, and specifically, what needs to be corrected in the file, and there is very little wiggle-room on what they will accept. Whenever you are considering a Rapid Re -Score your broker will use a specific credit analyzer tool and work with their agency to detail issues
Rapid Re-Score takes approximately 72 hours from the time the bureaus receive the documentation, so don't waste time getting it started! Start working on explanatory letter(s) for creditor(s) ASAP. We can guide you on what the letter needs to say, just call us.
Rapid Re-Score is not cheap, so make sure to confirm and know how much the charges are and be prepared to pay up front for the service.
Brokers use Rapid Re-Score to remove derogatory accounts that do not belong to the borrower; or to remove incorrect late payments, etc. We do not use Rapid Re-Score to show collections as PAID. This action will usually LOWER the score(s). It is better in some cases such as bankruptcy, for the borrower to make their own inquiries, as this shows their initiative in correcting old patterns.
NOTE: RESULTS OF RAPID RE-SCORE AND CREDIT ANALYZERS ARE NOT GUARANTEED. They are tools to assist your improving your score.
What about Disputes?
Every consumer has the right to dispute information which appears in their credit report. You can find details on how to file disputes on the various bureaus' websites.
In general the borrower will need to:
Get a credit report direct from the bureau(s) with which they are disputing information. The report will be free if requested within 30 days of a denial of credit.
Send a letter with any supporting documentation to the bureau(s) via overnight mail or certified mail with a return receipt requested.
The Fair Credit Reporting Act gives the bureau 5 days to notify the creditor of the dispute and to request an investigation. Within 30 days the creditor must report back to the bureau regarding whether the information should be modified, deleted, or remain unchanged. If there is no response from the creditor then the bureau must remove the information from the file. However, if within 10 days after that the creditor reports that the information was correct then the bureau will add that info back to the file. The bureau must then notify the consumer of this within 5 days.
Note: Make sure that any corrections made to bankruptcies or collection accounts reflect the correct Release or Clearance dates rather then the current date. You do not want the 7 -10 year clock to start over at day 1.
How long will that remain on the credit report?
Closed Accounts: Indefinitely
Collections: 7 years.
Bankruptcies: 10 years from released date.
Judgments: 7 years from Satisfied date.
For more information, check out my other blog here, or contact me directly.
Tony D. Howell
Mortgage Consultant
Olympic Mortgage Consultants, Inc.
910-264-7802
http://www.tonydhowell.com/
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