Credit Scores Where Did They Come From & What Are They???

Mortgage and Lending with George Souto NMLS #65149 FHA, CHFA, VA Mortgages NMLS #65149

 I have read a number of Posts here on ActiveRain on Credit and Credit Scores, and I have written Posts on this same topic myself.  All of the Post that I have read or written provided good information on how to improve your Credit, or on what effects your Credit Scores.  But I have not seen any Posts on “where Credit Scores came from, what they are, and why we have them”.  So I will attempt in this Post to begin to do that.

Before Credit Scores were established, a person was given credit solely based on another human being’s judgment and opinion.  Each lender based their decision on what they knew about a particular person from their personal experience, or by information that someone else provided them with.  This was not a very good or accurate way of making such an important decision. 

So over a period of time lenders started to establish a system that would assign points to different components of a person’s Credit History.  By doing this, a lot of the personal opinion was removed from deciding who a lender would give credit to, and who they would not.  But this still did not completely remove a lender’s personal bias from the decision, and it was still a very slow process.  Lenders continued to refine this point system, and by the 1980’s they began to develop the different Credit Models that are in place today.  Since then much of the human influence was eliminated from the Credit Scoring Process.  Score began to be generated by computers that were able to compute information accurately, and very quickly.  Because of this lenders are now able to make credit decision solely on facts, without human prejudice involved in their decision.

First lets start with what are Credit Scores?  Credit scores are numbers that lenders use to help them decide if they should lend a person money or make credit available to them, and how likely is it that they will pay it back. Credit scores are sometimes also referred to as “Risk Scores” because they represent the level of risk that a borrower will repay the money borrowed in the manor and time that it was agreed upon.  Credit Scores are generated through statistical models which use information that has been collected on a person’s credit report.  These scores are produced when a lender pulls credit on a borrower, and they are included with the borrowers credit history.  However, the scores are not made a part of the borrowers credit history, because they only represent a snap shot of that moment in time.  

As a borrowers credit information changes (payments, new accounts, etc.), so does their Credit Score, how and how much a Credit Score changes depends on the “Scoring Model that is used.  There are many different models Consumer Models also know as Educational Models, Collection Models, Bankruptcy Models, Auto Models, and the one that the Real Estate industry ia most familiar with Mortgage Models.  Credit Scores vary based on what model is used, and even sometimes within these models.  For example most Mortgage Companies and Banks will use a borrowers middle score to determining their credit worthiness and level of risk.  However, some have modified the Mortgage Model to fit certain criteria that is more important to them then to another Mortgage Lender.  For example this is the case with our Alt “A” products, they use a modified model which is stricter than the one we use for conventional loans.  So in there case we use the lowest Credit Score to determine whether or not a borrower qualifies for one of those Loan Programs.

These Credit Score Models are developed by looking at the credit history of hundreds of thousands of borrowers to determine common traits and patterns.  With this information Credit Score Models are then created by using this information to try to predict how a group of people with similar traits and behaviors will behave in the future.  By doing this they can develop models that will place different weights and values on certain criteria which has more or less impact on that particular industry.

Credit Scores are not effected by a person’s race, religion, sex (or preference), marital status, or even if the person is on some type of government assistance.  These things can not be considered in the information that makes up a person’s Credit Score.  However, lenders can take into consideration age, salary, occupation, employment history and other similar information.

Next week I will try to further explain what happens once information is collected and applied to these different Credit Models, as well as why Credit Scores vary among the three major Credit Reporting Agencies in the US, Equifax, Experian, and TransUnion.  Stay tuned for more.



Info about the author:

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or

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 Info about the author:

George Souto NMLS# 65149 is a Loan Originator who is licensed in #CT, #RI, #MA, #NH, & a #FL Licensed Lender who can assist you with all your #FHA, #Conventional, #VA, #USDA, and #State Bonded Progam #mortgage needs in #CT, #RI, #MA, #NH, & #FL. George resides in Middlesex County which includes #Middletown, #Old Saybrook, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam, #Moodus, #Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or

Comments (34)

Jason Price
Mortgage Financial Group, Inc (NMLS 219650) - Tavares, FL
The Mortgage Rider
Oh, I forgot to mention... I am surpirsed that this did not get featured for the whole AR community, but I will definitely see to it that this gets featured in the Mortgage group.  It is well worth the feature.
Feb 11, 2007 03:52 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Kaushik, the reason for that is because there were so many myths out there about Credit Scores, and unfortunately many of them were created by Loan Officers themselves that were trying to scare their prospects from looking else where.  So it is time that we start to clear up some of the mystery.

Jennifer, hopefully it will be a little bit better understood by the time I finish, and please let me know if there is some thing that you would like me to include. 

Jason, thank you for feeling that this should have been featured, but these days what is important to me is that people read what I write and not about the "stars".  Jason yes please feel free to call me at any time and I would be happy to go over that with you.  Best number to reach me at is my Cell Phone (860) 573-1308.


Feb 11, 2007 01:56 PM
Leigh Brown
Leigh Brown & Associates, RE/MAX Executive - Charlotte, NC
CEO, Dream Maker - Charlotte, NC

Thank you for the information, as always!  I too have missed your posts. =) 

So can you please write a post about the coming 4th credit bureau and whether it's going to be good or bad, in the eyes of the lending community? =)

Feb 15, 2007 03:16 AM
John Cilladi
Keller Williams Real Estate - Exton, PA
REALTOR, EcoBroker, e-PRO
I look forward to reading more from you. You have a clear, easy-to-read presentation style.
Feb 15, 2007 10:19 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Leigh, I have not heard much about that so far but I will ask my Credit Report Companies when they come in later this month and share the information that they give me.

John, I Posted a blog yesterday that continued to provide more information on this topic. "Why Are Credit Scores Different Between Credit Reports & Credit Agencies???" 

Feb 15, 2007 01:43 PM
Eddy Martinez
Nationwide Funding Group - Highland Park, CA

Sadly ive had clients who feel that their credit scores are based on their race and income. But after representation of several facts about their credit history they are delighted to see that this isnt so.

Great info George this should be a featured post on the main AR blog dashboard.  


Feb 22, 2007 06:43 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert
Eddy, thank you for commenting and feeling that this Post was worth being a featured post.  But it does not matter if AR features it or not, because it is more important to me to have friends like you readying it and feeling like it was worth your time.  That is more important than a gold star.
Feb 22, 2007 11:48 AM
Angela Wagner
Coldwell Banker Gundaker - Saint Charles, MO
There should be a course in high school and a mandatory course in college on credit scoring.  Espcailly when campuses allow credit companys to come on campus and give cards away. There are so many people out there not aware of what their score is. Thanks for the info.
Feb 23, 2007 04:35 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Angela, that is a great idea.  Many Loan Officers could also benifit from taking those courses also.

Feb 23, 2007 05:51 AM
John Klassen
M & T Bank - Kingston, NY
Well done. We would all do well top keep up to date on this critical portion of the business. Too many times I hear many of the myths that some loan officers tell clients regarding their credit scores.
Feb 25, 2007 07:41 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert
John, thanks for stoping by and commenting.  I would like to think that it is myths that they are spreading, but sometimes I wonder if they are saying it because they really don't know what they are talking about.  I am starting to find more and more people in this business who don't have much of a clue as to what they are talking about.
Feb 25, 2007 01:40 PM
Eddy Martinez
Nationwide Funding Group - Highland Park, CA

George I am with you on that one, the gold star is overrated. Keep up the great blogs :)


Feb 25, 2007 04:11 PM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert
Eddy thanky you for the encouragement.
Feb 26, 2007 12:41 AM
Beth Bastian
Rosemont Financial Inc - Simi Valley, CA
Simi Valley Real Estate
I was an underwriter when scores came out.  Before the scores, as a underwriter you would add the debt dived by the balance factor is the lates, it was very time consuming.
Mar 12, 2007 05:26 PM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert
Beth, wow that does sound time consuming, fortunately for me we do not have to do that any more.
Mar 13, 2007 05:01 AM
R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham
Bank of England (NMLS#418481) - Raleigh, NC
Bob Mitchell (NMLS#1046286)

Credit scoring should be illegal.  I'm in the process of writing a blog to this effect, but my basic argument is that due to the huge percentage of credit reports that contain inaccurate information, the system is flawed from the get go. 

Also, the fact that the various credit scoring models take into account the type of credit that you have utilized in the past, such as if you used a finance company vs. putting something on a charge card, it's discriminatory (Minorities are much more likely to utilize finance companies vs. non-minorities.

If nothing else, the criteria that goes into establishing your score should be made public knowledge.  Right now it's considered "propriatory".  To me, if you are going to be judged by a set of criteria, especially one that has as much of an effect upon your life as your credit score, shouldn't you have the right to know what that criteria is?


Mar 19, 2007 11:17 PM
Ray Saenz
Exit Realty Laredo - Laredo, TX
Homes for Sale in Laredo, TX - Texas, Realtor


Good Library from credit explanation :)

Keep the good work


Mar 26, 2007 06:30 PM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert
Ray, glad you liked this one.
Mar 27, 2007 11:29 AM
Steven Shewell
Primary Residential Mortgage, Inc. - Ephrata, PA
The Mortgage Maverick


Good information.  I have spent many years assisting clients to clean up their credit so I have also learned quite a bit about the scoring model.  The sad part is that I have had to learn most of it by trial and error.  Every time I have attended a seminar in which one of the bureaus was going to "share the secrets" I always came away with more questions than answers.

People would be surprised to learn how relatively easy it is to fix their credit profiles.  The part I find so disheartening is that most lenders who have any concept of credit scoring are only looking to provide "quick fixes" to their clients credit scores so that they can get the deal closed.  They don't care if it helps the client long term.

I fix their credit so it is once and done.  The account is updated correctly and won't hurt them later.  That's not to say that some of the collection agencies don't report the account as active again, because they do.  But I maintain contact with the clients to ensure that everything gets cleaned up.

Thanks for the great information.

Apr 12, 2007 12:56 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Steven, I do the samething, it does not do a Borrower much good if all I have done is cleared up a credit issue enough to be able to do the loan, but the issue still remains.  What we do is to remove it completely so that it is not an issue again in the future.

Thank you for you input Steven. 

Apr 12, 2007 01:06 AM