You've
heard of credit scoring, but what exactly is it? Credit
scoring is a scientific method that uses statistical
models to assess an individual's credit worthiness based
on his or her credit history and current credit
accounts. Credit scoring was first developed in the
1950s, but has come into increasing use in the last two
decades.
In the
early 1980s the three major credit bureaus,
Experian,
Equifax, and
TransUnion all worked with the Fair Isaac
Corp. to develop generic scoring models that allow each
bureau to offer a score based solely on the contents of
the credit bureau's data about an individual. Creditors
especially those in the mortgage industry frequently use
the scores when
deciding who receives loans. They can
order your score, commonly called a
FICO score, from one
of the bureaus, but it only draws upon information from
your credit report. Individual creditors often also
consider other information, such as your salary or how
long you have been employed at the same company when
making loan decisions.
Now you
can see the type of score lenders use when deciding
whether to give you that loan. Along with your Personal
Credit Score, you’ll receive personalized analysis and
tips that can help you improve your credit rating. So
know the score today!
What does it mean?
Each
credit bureau has its own unique system for compiling
credit scores. However, the scoring models have been
normalized so a numerical score at one bureau is the
equivalent of the same numerical score at another. Thus,
a score of 700 from
Equifax indicates the same
creditworthiness as a score of 700 from
TransUnion or
Experian, even though the calculations used to determine
those scores are different at each bureau.
A
computer-generated score is compiled using information
from an individual's credit report, such as how much
money is owed and whether payments have been made on
time. Then that score is compared to the credit
performance of consumers with similar profiles. The
scoring system awards points for each factor that helps
predict who is most likely to repay a
debt. A total
number of points-a credit score--helps predict how
likely it is that you will repay a loan and make
payments on time.
Credit
scores range from 375 to 900 points, but those numbers
mean little on their own. They become meaningful and
useful within the context of a particular lender's own
cutoff points and underwriting guidelines.
What’s a good score?
In
general, you are likely to be considered a better credit
risk if your FICO score is high. Under mortgage lending
guidelines, for example, a score of 650 or above
indicates a very good credit history. People with these
scores will usually find obtaining credit quick and
easy, and will have a good chance to get it on favorable
terms.
Scores
between 620 and 650 (average FICO scores fall into this
range) indicate basically good credit, but also suggest
to lenders that they should look at the potential
borrower to assess any particular credit risks before
extending a large loan or high credit limit. People with
scores in this range have a good chance at obtaining
credit at a good rate, but may have to provide
additional documentation and explanations to the lender
before a large loan is approved. This means that their
loan closing may take longer, making their experience
more like that of borrowers in the days before credit
scoring, when every individual was researched.
A score
below 620 may prevent a borrower from getting the best
interest rates, as they may be considered a greater
credit risk-but it does not mean that they can't get
credit. The process will probably be lengthier and, as
noted, the terms may be less appealing, but often credit
can still be obtained.
Mortgage Glossary7
