The
credit score, one of the many tools creditors use to
help decide the outcome of credit requests, has been
enhanced. This refinement is a boon to consumers by
giving a broader picture of a person’s credit profile.
Fair
Isaac Corp., the San Rafael California company that
pioneered the
FICO
credit scoring system in use today,
now has a product titled “Next Generation Credit Risk
Score.” Risk factor scoring is used in all
credit-granting situations—including mortgages—and by
its ability to draw upon the highly predicative powers
contained in the rich consumer credit databases, the
enhanced FICO numbers promise an even sharper image.
Although the exact details of how the new scoring system
is going to function are information confidential to
Fair Isaac, the outcome to consumers is likely to be a
broader, and therefore possibly more forgiving,
measurement of a person’s risk as a potential borrower.
In other words, if you were in a gray area with your old
credit score, the new system might help push your score
into the light of credit approval.
A refresher course in credit scoring basics.
To
understand the benefit Next Generation scoring may bring
to your score, it is important to first understand how
basic
credit scoring works. FICO scores run anywhere
from 300-900, depending on what system is being used.
Credit scoring is a process designed to help predict the
future; at least the future regarding whether or not you
will live up to the credit obligations you incur now.
When you submit a request for a loan or for credit, the
lender or creditor requests a credit bureau report
showing your credit-related history. Credit reports
usually come loaded with positive as well as negative
information. The Next Generation scoring helps cut
through this massive amount of information more
precisely than the old
FICO scoring could. You may want
to ask lenders which version they are using because not
all of them use the Next Generation score.
Based on
past experience, Fair Isaac has determined the most
powerful indicators of future credit risk, namely
severity, frequency, and recency, and applied these in
the making of their Next Generation scoring. They’ve
developed models that weigh financial data and produce a
score that indicates risk level. Lenders can then decide
whether or not they want to extend credit to borrowers
who represent that particular level of risk.
Severity
refers to a how damaging a situation is likely to be. In
other words, a 30-day late payment is not as serious as
a 90-day late payment and one late payment is not as
credit risky as several late payments, thus the
reference to frequency. Recency refers to how recently
the credit offense occurred. A credit lapse five years
ago is not as risky as a credit lapse only a year ago.
If you’ve been paying your bills punctually for the last
couple of years, you’re generally in better shape
because your recent history is good.
Your
available credit may also affect your score. If you have
no cards, you have no credit history and thus, no way of
showing you can be trusted based on past performance. If
you have too much credit—especially with a sky-high
total credit limit or high outstanding balances—you may
seem just as risky as a person with no credit. In fact,
once you hit seven open credit cards or more, your score
may start to decline on that information alone.
How do I raise my score?
Really,
the only way to help raise any credit score is to pay
your creditors on time, every time, for at least two
years. This is not a guarantee, of course, due to the
many unique credit-scoring factors involved in each in
person’s report, but a history of borrowing and paying
prudently in recent years never hurts your score and,
sometimes, can turn your score around more than you
might think.
Another
good rule of thumb is to request new credit with
restraint and use it regularly, but prudently. A few
credit accounts handled well can go a long way toward
keeping your score high or helping to increase it. This,
coupled with Next Generation
Credit Scoring, just may
cast a brighter light getting the loan or credit you
need.
Your
Personal Credit Score doesn’t just let you see the type
of score lenders use, it also gives you valuable
information that can help you improve your credit score.
It comes with a personalized analysis that shows you the
factors that are impacting your rating. Plus, it
includes tips based on your report to help improve your
credit rating.
Mortgage Glossary6
