"Credit scoring," or credit repository scoring, is a complex mathematical means of applying a numerical value to a consumer's existing credit file. The final number is used to assess risk and establish the likelihood of a borrower paying back a loan.
Credit scoring has been around since the 1950's and has been widely used in consumer lending; however, it was not introduced to mortgage lending until October 1995, when Freddie Mac issued an industry letter. Freddie Mac validated the predictive value of certain credit scores by endorsing MDS Bankruptcy scores and FICO, or Fair, Isaac and Company, Inc. Credit repository scores.
Since that time, the best known and most widely accepted score in the mortgage lending industry has become the consumer score produced by FICO, or Fair, Isaac and Company, Inc.
Other types of scores are available, such as MDS Bankruptcy scores, though not as widely endorsed throughout the entire mortgage lending industry.
In addition, FICO, and other credit scoring agencies work in conjunction with repositories (and other companies) to create different types of scoring models for other industries. For instance, FICO and Experian have credit scoring models available that predict the likelihood of default specifically for car loans; and another for installment loans.
1. FAIR ISAAC MODELS
The following are the most widely used credit bureau models, and approved for use by Fannie Mae, Freddie Mac, and used by most lenders in the mortgage lending industry:
- Repository/Bureau - Credit Model
- Experian - TRW/Fair, Isaac Model
- Trans Union - EMPERICA
- Equifax - BEACON
Why would there be different scores for the same person if they were all using the same models?
2. FACTORS
Thirty-three factors have been determined to be the most predictive variables in credit risk assessment. These factors are broken down into five categories describing patterns of credit usage. They are listed here in order of their weight in the analysis.
Because there are so many hundreds of combinations of variables, there is no way to determine how much one single factor will impact any given score. And, the information is proprietary anyway.
1. Previous credit performance
2. Current level of indebtedness
3. Amount of time that credit has been in use
4. Pursuit of new credit
3. CHANGING THE SCORE
If the score is correct...
Credit scores are correct as long as the information contained in the repository is correct. If the credit information is accurate, scores can be changed over time by using the reason codes listed:
REASON CODES:
Reason codes identify factors that have the most influence in keeping the score from being higher.
Because credit scores are snapshots, they change every time they are accessed. To improve the scores, resolve the issues listed in the reason codes.
NOTE: It is recommended that you don't access the scores often, because these count as inquiries and affect the overall score.
4. CHANGING THE SCORE
If the Score is incorrect:
IT IS POSSIBLE TO HAVE A SCORE CORRECTED WITHIN 48 HOURS!
Call 801-597-8832