I am really going to date myself but I remember when we took a loan application, and asked the borrower, "How's your credit?' They would tell us I few late payments here and there.
I'd ask if there were any late mortgage payments, (the kiss of death back then) any bankruptcies, no.
Then I was good to go.
I would write the loan, and then order a credit report.
I would have to wait for it to arrive snail mail! Then they invented a machine that the credit bureaus would set up in your office and they would send your credit reports over this machine.
It would take 24-48 hours.
We thought this was great! No scores, just a borrowers credit would show up.
The borrower would then be asked to write a letter of explanation for any late payments, judgments, or inquires on their report.
An underwriter would weigh all things out and determine borrowers credit worthiness.
Were they one-time events that were isolated issues, or was there a pattern of historical late payments? It was a human's decision to determine the borrower's risk factor not a machine.
Not any more, Fair Isaac Company, designed the formula used to determine a borrowers credit score.
Which is where the term FICO score originated.
They will not give out the exact formula used due to fear of manipulation of the system, but we do know, age, length of time on a job, the type of job, banking status (checking or savings accounts), length living in home, and credit history along with inquires into your credit all effect your score.
Now your rate, your loan to value, and the documentation needed to clear conditions is all determined by your current middle score of all three bureaus.
The three bureaus are Trans Union, Experian, and Equifax.
It has been my experience Equifax is always lower than other two.
Trans Union is often the high score.
As for lending purposes we must use the middle score.
If for some reason, we only get two scores we must use the lower of the two.
These bureaus compile information about you the borrower and in turn sell it to the lenders via a credit reporting company.
The information contained by each bureau is not the same, the bureaus do not share information and creditors are only obligated to report to one bureau.
Some do report to more than one, however one is all they are obligated to report to.
So this is why we have to pull a three bureau merged credit report, so our underwriters can get a true picture of the borrower.
This is also why we use the middle score.
Included in your credit report is your: -Name, any past names used -Social security number -Address, as well as previous addresses -Place of employment -Length of time employed with company -Credit standing with all your creditors, are your payments on time, or late, how many payments have you made -As well as your highest balance with creditor, current balance and monthly payment -Public records; such as foreclosure, bankruptcy, judgments, lawsuits, garnishments -Tax Liens -Collections -Credit Inquiries made into your account All Public records remain for ten years, while collections and credit accounts (Mortgage loans, car loans, credit cards, installment loans) remain on your credit for seven years.
Inquiries into your account remain for up to two years.
This is what makes up your credit score.
Each of the three credit bureaus reports separately with different information so that is why all three bureaus must be pulled.
Lenders are charged a small fee for doing this.
This is how each individual ends up with three scores, because they have three different credit files.
The lender will use the middle of the three to determine a borrowers credit risk.
The scores range from 300 - 850.
I can honestly say it is rare for me to see a score over 800.
I have seen quite a few in the 700's, but many seem to fall in the mid to high 600's.
Typically if a borrower has had a bankruptcy recently or impaired credit I will see scores in the mid to high 500's.
And then there are those people that have no score.
They are young with no credit history, recently divorced and all credit was in spouses name, or are from another country and have established no credit in the US.
All of these pose a difficult situation for the borrower because a lender wants a score! There are a few programs that work with these situations, but most often they will pay a slightly higher rate.
Borrowers should review their credit reports at least once a year.
They are offered free of charge by each bureau once a year.
However, these free reports do not show your scores.
Often, when a borrower pulls their credit on line it is different when I pull it.
I'm not sure why that is, but it has happened numerous times.
I have found that not only are lenders using your scores to rate your risk for a mortgage, a car loan, but also insurance agencies have also started using them to determine your auto insurance rates.
It sounds a bit unfair to me, if you lost your job, ran behind on a few bills, or whatever impaired your credit would now have an effect on your rates for auto insurance.
How to Improve Your Score? Pay your bills on time, never fall behind 30 days.
If you are late 15 -29 days it is never reported on your credit report, only 30 days and over! If you must pay a bill late pay your phone, electric, or water late.
They do not report to the credit reports as of this time.
I am not advocating you pay any bill late but if you must these three you can jiggle with, just don't get to late or they will turn off your service and you will have to pay a reactivation fee.
The gas company does report so pay on time.
Simply use good common sense and pay your bills as requested to.
Also by having a variety of credit is also seen as a positive, especially if you haven't maxed it out.
You will get a higher score if you have 40-50% of the credit available to you, not used.
Beware of companies that guaranty raising your credit score? What about credit repair agencies? Bankruptcy?