This section contains comprehensive information on credit
scores and how they work. CCI Credit encourages you to read all the information
contained in this section for a thorough understanding of credit scoring.
About credit scores
Credit bureau scores are often called "FICO scores" because
most credit bureau scores used in the United States are produced from
software developed by Fair, Isaac and Company (FICO). FICO scores are
provided to lenders by the three major credit bureaus: Equifax, Experian
and TransUnion. Credit scores give prospective credit grantors the best
guide regarding the risk of poor payment performance or non-payment based
solely on credit report data. The higher the score, the lower the indicated
risk. But no score says whether a specific individual will be a "good" or "bad" customer.
While many lenders use credit scores to help them make lending decisions,
each lender has its own strategy, including the level of risk it
finds acceptable for a given credit product. No single "cutoff score" determines
a borrower's ability to secure credit, and there are additional factors
that lenders use to determine your actual interest rates. Lenders
can charge higher interest rates for lower credit score candidates, for
example, to cover their costs of default from that category of individuals.
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How credit scoring works
Credit scores are determined by a mathematical model that evaluates
many types of information in a consumer's credit file. By comparing
this information to the patterns in hundreds of thousands of past credit reports, the score identifies
the lender's level of future credit risk. In order for a credit score to be calculated on a consumer's credit
file, the file must contain at least one account, which has been open for
six months or longer. In addition, the file must contain at least one account
that has been updated in the past six months. This ensures that there is enough
information -- and enough recent information -- in the credit
file on which to base a score.
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What a credit score uses
The following are the five main categories which credit scores
evaluate and the weight attached to each:
1. Payment history: 35%
2. Amounts owed on accounts: 30%
3. Length of credit history: 15%
4. New credit inquiries: 10%
5. Types of credit used:10%
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What a credit score ignores
Credit scores consider a wide range of information on the consumer's
credit report. However, they do not consider:
- A consumer's race, color, religion, national origin, sex and
marital status. US law prohibits credit scoring from considering
these facts,
as well as any receipt of public assistance, or the exercise
of any consumer right under the Consumer Credit Protection Act.
- A
consumer's age. Other types of scores may consider age, but FICO
scores
don't.
- A consumer's salary, occupation, title, employer, date
employed or employment history. Lenders may consider this information,
however, as may other types of scores.
- Where a consumer lives.
- Any interest rate being charged on
a particular credit card or other account.
- Any items reported
as child/family support obligations or rental agreements.
- Certain
types of inquiries* (requests for a consumer's credit report).
- Any
information not found in the consumer's credit report.
- Any information
that is not proven to be predictive of future credit performance.
*The score does not count "consumer-initiated" inquiries—requests
the consumer has made for his/her credit report. It also
does not count "promotional
inquiries"—requests made by lenders in order to
make a consumer a "pre-approved" credit offer (for
example, credit card offers by mail), or "administrative
inquiries"—requests
made by lenders to review a consumer's account with them.
Requests that
are marked as coming from employers are not counted either.
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Things to remember when examining credit scores
- A score uses all five categories of information,
not just one or two.
- No one piece of information or factor alone
will determine the score.
- The relative weight of any factor in
a scoring category depends on the overall information in the
credit report.
- A consumer's credit score only looks at information
in his/her credit report.
- The consumer's score considers both
positive and negative information in his/her credit report. Late
payments will lower the score, but establishing or re-establishing a good track record of
making payments on time will raise the score.
For some people, a given factor may be more important than for someone else with a different
credit history. For example, late payments by a consumer with a bankruptcy in their recent
credit history may lower a score more points than for a consumer with an otherwise positive
repayment history. In addition, as the information in the credit report changes, so does the
importance of any factor in determining the score. Thus, it's impossible to say exactly how important
any single factor is in determining the score; even the levels of importance shown here are for
the general population, and will be different for different credit profiles. What's important
is the mix of information, which varies from person to person, and for any one person over time.
Note that lenders also look at many things when making a credit decision: the consumer's
income, how long he/she has worked at his/her present job, and the kind of credit the consumer is
requesting.
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Payment history
Payment history accounts for approximately
35% of the weight of the score.
This is one of the most important factors in a credit score. However, late payments are not an
automatic "score-killer." An overall good credit picture can outweigh one or two instances
of late credit card payments, for example. By the same token, having no late payments in the credit
report doesn't mean the consumer will get a "perfect score." Some 60%-65% of credit reports
show no late payments at all. The payment history is just one piece of information used in calculating
the score.
This category takes into account:
- Payment information on many types of accounts.
These will include credit cards (such as Visa, MasterCard, American Express and
Discover), retail accounts (credit from stores where the consumer does business, such as department store credit
cards), installment loans (loans where the consumer makes regular payments, such as car loans, recreational vehicles, and signature
loans), finance company accounts and mortgage loans.
- Public record and collection items: bankruptcy, foreclosures, suits, wage attachments,
liens and judgments.
These are considered quite serious, although older items and items with small amounts will count less
than more recent items or those with larger amounts. It is also important to note that even though a collection, judgment
or tax lien is reported as paid that the account is still considered seriously delinquent because of the fact that it went
to a collection status. Never pay off an old collection, judgment, tax lien, etc. until the close of escrow, as doing so turns
the delinquency into a current event (according to the "date of last activity") and the consumer's score will go down.
- Details on late or missed payments ("delinquencies"), public record and collection items.
Specifically, how late they were, how much was owed, how recently they occurred and how many there are. A 60-day
late payment is not as risky as a 90-day late payment, in and of itself. But recency and frequency count too. A 60-day late payment made just a month
ago will count more than a 90-day late payment from five years ago. Note that closing an account on which the consumer had previously missed a payment
or satisfying a judgment or collection item does not make the late payment or item disappear from the credit report. An important qualification
considering late payments is that a 30-day late payment is not considered a serious delinquency. 60-day or more late payments
are considered serious delinquencies. A 30-day late payment will effect the credit score but not nearly as much as a 60-day or greater late payment.
- How many accounts show no late payments?
A good track record on most of the consumer's credit accounts will increase the credit
score.
Payment history tips
The best advice is to manage credit responsibly over time.
- Pay bills on time.
Delinquent payments and collections can have a major negative
impact on the score. Late payments reported
recently are more detrimental to the score than are late payments that were
reported in the past.
- If the consumer has missed payments,
he/she must get current and stay current.
The longer the consumer pays his/her
bills on time, the better their score.
- Be aware that paying off a collection account will not remove
it from the credit report.
It will stay on the report for seven
years
- If a consumer is having trouble
making ends meet, he/she should contact creditors or see a legitimate
credit
counselor.
This won't improve the score immediately, but if he/she can begin to manage their
credit and pay on time, their score will get better over time. A recent change at Fair Isaac no longer penalizes
a score for the consumer entering Consumer Credit Counseling.
- Check your credit report regularly for errors. At least annually is recommended.
Check for erroneous late payments and have them corrected with the reporting bureau.
Check for old, especially derogatory, information that is old enough to be purged from the report.
Ensure that accounts, again especially derogatory accounts, are reported with the actual true date of last activity.
This would include accounts that were discharged through a bankruptcy. The date of last activity of bankruptcy accounts
should match the date that the bankruptcy was discharged.
Here is a list of all past payment history factors:
- Account payment information on specific types of accounts
(credit cards, retail accounts, installment loans,
finance company accounts, mortgage, etc.)
- Presence of adverse public records
(bankruptcy, judgments, suits, liens, wage attachments, etc.),
collection
items, and/or delinquency (past due items)
- Severity of delinquency (how long
past due)
- Amount past due on delinquent accounts or collection
items
- Time since (recency of) past due items (delinquency), adverse
public records (if any), or collection
items (if any)
- Number of past due items on file
- Number of accounts paid as
agreed
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Amounts owed
The amount owed on accounts makes up approximately 30% of the weight of the score.
Having credit accounts and owing money on them does not mean the consumer is a high-risk
borrower and gets a low score. However, owing a great deal of money on many accounts
can indicate that a person is overextended, and is more likely to make some payments late
or not at all. Part of the science of scoring is determining how much is too much for a given
credit profile.
This category takes into account:
- The amount owed on all accounts.
Even if the consumer pays off his/her credit cards in full every month, their credit report
may show a balance on those cards. That's because creditors report
a month in arrears.
- The amount owed on different types of accounts.
In addition to the overall amount the consumer owes, the score considers the amount he/she
may owe on specific types of accounts, such as credit cards and installment loans.
- Whether the consumer is showing a balance on certain types
of accounts.
In some cases, having a very small balance without missing
a payment shows that the consumer has managed credit responsibly, and may be slightly better
than no balance at all. On the other hand, closing unused credit accounts that show zero balances
and that are in good standing will not generally raise your score. In fact it could lower the score.
- How many accounts have balances.
A large number can indicate higher risk of over-extension.
- How much of the total credit line is being used on
credit cards and other "revolving credit" accounts.
Based on the evaluation of thousands of credit files, a consumer close to
being "maxed out" on many credit cards statistically has a higher chance of
having trouble making payments in the future. A consumer may wonder why the credit score
seems low when minimum payments have been made on time month after month. It's likely that
the balance owing on the account is over 50% and triggers the "high proportion of balances
to credit limits" scoring factor.
Amounts owed tips
- Keep balances low on credit cards and other "revolving credit."
High outstanding debt can negatively affect a score. Maintain balances at or below 50% of the available credit limit.
- Pay off debt rather than moving it around.
The most effective way to improve the score in this area is by
paying down the revolving redit. In fact, owing the same amount but consolidating
the amount onto fewer open accounts may lower the score.
- Sometimes financial planners recommend consolidating higher interest debt into a
new lower interest account.
While sensible in lowering interest rates, the
strategy can backfire in credit scores. Opening a new account with a high balance and closing pre-existing accounts
all typically lower scores for many months until the balance comes below 50% and the new account has been
open for longer than a year. If you are in the market for a home now or in the next 12 months, avoid this mistake.
- Don't close unused credit cards as a short-term strategy to raise the consumer's score.
- Don't open a number of new credit cards that the consumer doesn't need, just to increase his/her available credit.
This approach could backfire and actually lower the score, depending on the length of time the consumer
has had established credit.
Here is a list of all "amount of credit owning" category factors:
- Amount owing on accounts
- Amount owing on specific types of
accounts
- Lack of a specific type of balance, in some cases
- Number of
accounts with balances
- Proportion of credit lines used (proportion
of balances to total credit limits
on certain types of revolving accounts)
- Proportion of installment loan
amounts still owing (proportion of balance to
original loan amount on certain types of installment loans)
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Length of credit
history
Length of credit history accounts for approximately 15% of the weight of the score.
In general, a longer credit history will increase the score. However, even people who have
not been using credit long may get high scores, depending on how the rest of their credit report looks.
This score takes into account:
- How long the credit accounts have been established, in general.
The score considers both the age of the oldest account and an average age of all the accounts.
- How long specific credit accounts have been established.
- How long it has been since the consumer used certain accounts.
Length of credit history tip
- If the consumer has been managing credit for a short time, he/she shouldn't
open a lot of new accounts too rapidly.
- New accounts will lower the average account age, which will have a larger effect
on the score if the consumer doesn't have a lot of other credit information. Also,
rapid account buildup can look risky if the consumer is a new credit user.
- Remember that most new accounts don't begin to positively add to the credit history for 12-13 months.
Here's a list of all "length of time credit established" category factors:
- Time since accounts opened
- Time since accounts opened, by specific type of account
- Time since account activity
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New credit inquiries
New credit inquiries account for approximately 10% of the weight of the score.
People tend to have more credit today and credit scores reflect this fact. However, research
shows that opening several credit accounts in a short period of time does represent greater
risk—especially for people who do not have a long-established credit history. This also
extends to requests for credit, as indicated by certain "inquiries" to the credit reporting agencies,
resulting from requests by the consumer for new credit. An inquiry is a request by a lender to get a copy of
an applicant's credit report. Credit scores do a good job of distinguishing between a search for many new credit
accounts and rate shopping, which is generally not associated with higher risk.
This category takes into account:
- How many new accounts a consumer has.
The score looks at how many new accounts there are by type of account
(for example, how many newly opened credit cards the consumer has). It also may look at how many of
the accounts are new accounts.
- How long it has been since the consumer opened a new account.
Again, the score looks at this by type of account.
- How many recent requests for credit has the consumer made,
as indicated by inquiries to the credit reporting agencies.
Inquiries remain on the credit report for two years, although credit scores
only consider inquiries from the last 12 months. Consumers' own requests for
credit reports are not counted in the score. Also, the
score does not count requests a lender has made for a consumer's credit report
or score in order to make the consumer a "pre-approved" credit offer,
or to review the consumer's account with them, even though he/she may see these
inquiries on the credit report. There have been recent changes in the way the
FICO models count inquiries for scoring purposes. It is fairly complex and hard
to understand but the basic premise is that all auto and mortgage inquiries
made within a 14 day period are counted as one inquiry for scoring purposes.
The scoring models also ignore all inquiries within 30 days of scoring. Therefore,
when rate shopping, try to make your inquiries within a 2 week period.
- How long since credit report inquiries were made by lenders.
- Whether the consumer has a good recent credit
history, following past
payment problems.
Re-establishing credit and making payments on time after a period of late payment behavior will help to raise a score over time.
New credit inquiries tips
- Keep rate shopping within a two week period.
- Re-establish
credit history if there have been problems.
Opening new accounts responsibly and paying them off on
time will raise
the score in the long term.
- Remember that there is no score "cost" to
request
your own credit report.
This won't affect the score, as long as the consumer orders his/her credit report directly from
the credit report gency or through an organization authorized to provide credit reports to consumers.
Here's a list of all "new credit inquiries" category factors:
- Number of recently opened accounts, and proportion of
accounts that
are recently opened, by type of account
- Number of recent credit inquiries
- Time since recent account
opening(s), by type of account
- Time since credit inquiry(s)
- Re-establishment of positive
credit history following past payment problems
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Types of credit used
The types of credit used accounts for
another 10% of score's result.
The score will consider the mix of credit cards, retail
accounts, installment loans, and finance company accounts and mortgage
loans. The credit mix usually won't be a key factor in determining the score, but
it can be more important if there isn't a lot of other information on
which to base a score.
This score takes into account:
- What kinds of credit accounts the consumer has, and how
many of each.
The score also looks at the total number of accounts the consumer has.
For different credit profiles, how many is too many will vary.
Types of credit used tips
- Apply new credit accounts only
as needed.
Don't open accounts just to have a better credit mix; it
probably won't
raise the score.
- Have credit cards, but manage them responsibly.
In general, having credit cards and installment loans (and
paying timely payments) will raise the score. Someone with no credit cards, for example, tends to be
a higher risk than someone who has managed credit cards responsibly.
- Recognize
that closing an account doesn't make it go away.
A closed account will still show up on the credit report,
and may be considered by the score. And if you close
an account that has negative payment information from
the past, it will be bumped up in it's recency value
because you will have changed the "date of last
activity" to
the present.
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Interpreting
the credit score
On a mortgage credit report, along with a credit score,
up to four "score reason codes" are also delivered.
These explain the top reasons why the score was not higher.
If a request for credit is declined and the credit score
is part of the reason, these score reason codes can help
explain why the score wasn't higher. If the reason for a
low score is not obvious, the reason codes are the first
place to look.
In fact, the score reasons are more useful than the score itself in helping the broker and the consumer determine whether the credit report might contain errors,
and how the consumer might improve his/her score over time. However, if the report indicates
a high score (for example, in the mid-700s or higher) some of the reasons codes may not be very helpful. They may be marginal factors related
to the last three categories described previously
(length of credit history, new credit and types of credit in use).
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Common score reasons codes Here are the top ten most frequently given scoring reasons.
1. Serious delinquency.
2. Serious delinquency and public record or collection
filed.
3. Derogatory public record or collection filed.
4. Time since delinquency is too recent or unknown.
5. Level of delinquency on accounts.
6. Number of accounts with delinquency.
7. Amount owed on accounts.
8. Proportion of balances to credit limits on revolving
accounts is too high.
9. Length of time accounts have been established.
10. Too many accounts with balances.
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How CCI’s credit score analysis and optimization
tools can help you improve your credit score
CCI’s Credit Analyzer tool is a score improvement
report that is prepared using your particular credit
file. It is available through an
CCI mortgage broker, realtor or other approved customer. It examines
the specific tradelines in your credit file, analyzes them for opportunities
for improvements, recommends specific actions and estimates what score
boost the recommended actions will have. It can tell you, for example,
that by moving a certain portion of balance from one account to another
may raise the score an estimated 10 points. Some actions may have immediate
effects; others will demonstrate gains over time.
If you'd like to work with an CCI mortgage broker,
realtor or lender and use these tools to help you raise
your credit score, contact
us online.
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Rapid ReScore: Expedited corrections and updates during the
loan process
This service allows mortgage brokers to have credit report errors corrected
and a score recalculated within 3-5 business days. The corrections
are made at the repository level and require specific documentation,
as well
as CCI’s validation of the error or update with the creditor.
Rapid ReScore is not credit repair and is only available during the
process of actually applying for a home loan. It is not available directly
to
consumers, nor is it available outside of applying for a home loan.
When used, however, it can save the usual 30-60 day cycle for processing
credit
bureau errors directly by consumers.
Generally, CCI Credit needs to know what the error is, why it is an
error, and be provided proof of what the correction is that should be
made. CCI verifies the information and then sends the verified information
to the credit bureau reporting the error to re-verify. The bureau then
physically changes the raw data via computer, installs a buffer against
future tape update changes and confirms the change is in place. The
CCI customer (mortgage broker or lender) can now run a new credit report.
At that time new scores are calculated by the FICO scoring models.
For
more information, see the Rapid ReScore section of our website.
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