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Credit Debt Consolidation Info: Credit Scoring
It is important to learn these factors in order to improve your credit, before you decide to join a credit debt consolidation service.What is credit scoring?
- Empirically derived, statistical method of assessing risk
- Used to predict the relative likelihood that an individual will repay a credit obligation, such as a mortgage loan.
Information in a credit report
- Past payment behavior- current and historical delinquencies as well as their severity and prevalence.
- Level of indebtedness - outstanding debt balances, both in terms of $ and %
- Length of credit history
- Pursuit of new credit Types of credit available - generally less important than some of the other categories.
Factors prohibited under the Equal Credit Opportunity Act (ECOA)
- Race
- Age
- Gender
- Color
- Religion
- National Origin
- Marital Status
- Also excluded - - income, employment, where you live
Two most common models--
MDS bankruptcy score
scores range from about the 0 to 1300
higher scores = higher risk of default
FICO score
scores range from about the 300s to the 900s
higher scores = lower risk of default
Where do lenders obtain FICO scores?
Each of the three major credit repositories can produce a FICO score based on credit information in its files
Each repository markets FICO scores under its own trade name - -
- Equifax: Beacon score
- Trans Union: Empirica score
- Experian (formerly TRW): Experian/FICO score
Are credit scores predictive of credit risk?
Yes - - for all loans and all borrowers, an individual with a credit score below 620 is 2.7 times more likely to default on his/her mortgage loan than someone with a credit score between 660 and 699
Are low-income households more likely to have low credit scores?
- No - - A low-income buyer is as likely to have a high credit score as a high income home buyer.
- An individual's management of credit, as measured by a credit score, has little correlation with that individuals income.
- Looking at down payment as the primary risk factor overstates the real credit risk of many home buyers.
- Those who make only a 5% down payment but have a high credit score ( say, over 740) are LESS likely to default than those who put 30% down but have a credit score under 620.
NO - - There is no legal requirement for the lender to reveal a credit score to an applicant.
But if the application is denied, the lender must reveal the reason(s) for that denial.
What if the credit report contains errors?
- Individuals should contact the credit repository to report errors. You may not need a credit debt consolidation program after all!
- Under the Fair Credit Reporting Act, 30-day resolution is now required.
- Lesson: Always obtain credit reports from at least two repositories prior to applying for a mortgage loan to confirm that data is correct!!!!
- While you can improve your future score, it is unlikely that any single action you will take will have a large impact on your score immediately. That's because your score reflects your credit patterns over time. With this in mind, there are things you can do now that will improve your score in the future. These include paying your bills on time. Delinquent payments and collections can have a major negative impact on your score. As they get older and you pay all other obligations on time, the delinquent information will have less impact.
- Pay down your balances. High outstanding debt can affect your score.
- Pay bills on time
- Use revolving debt responsibly.
- Avoid large and quick build-up of new credit when you're preparing to buy a home.
- Code explanations that show which factors had the greatest impact on the final credit score.
- Up to four explanations codes are provided with each score.
- Example Code 01- Amount owed on accounts is too high (Equifax, TransUnion
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