Credit Scoring And The Lending Industry

When you apply for a mortgage, your lender will request a credit report from a credit reporting company. Along with the information, the local credit reporting company receives a numerical score. The score represents a composite of the borrower's credit history, employment, inquiries, bankruptcy, judgments, etc. The most famous of these scores is known as the FICO score. credit repair

The truth is that the Fair-Isaacs Company and the major credit repositories do not divulge exactly how the scoring model works. Due to the level of erroneous reporting to peoples' credit files, there has been pressure on Congress lately to make the credit repositories more accountable for the accuracy of the information they report. credit repair

Why is this important? The lending industry is moving toward "risk-based" pricing. That means the interest rate and/or fees a borrower pays will be based on the level of their scores!!! credit repair

If you have recently obtained your credit report and you are not happy with what was reported, you can take steps to correct the erroneous information on it. credit repair

The current scoring model as depicted on myfico.com is:

Five Factors Used in Determining a Credit Score:

There are five basic factors that constitute a credit score. Those factors are outlined here with their percent- age that is weighted into computing your score:

Payment History:

Approximately 35% of a credit score may be based upon payment history. A credit score is negatively impacted if bills are paid late or if there is a history of delinquent payments listed on the credit report, including matters of public record such as bankruptcy, collection accounts, etc.

Amounts Owed :

Approximately 30% of a credit score may be based upon amounts owed or other outstanding debt. A credit score can be negatively impacted if the amount owed is close to the credit limit. A low balance on two credit cards may be better than a high balance on one credit card.

Length of Credit History:

Approximately 15% of a credit score may be based upon length of credit history. A credit score can be positively impacted the longer that accounts have been open, especially if they are with one financial institution.

Taking on More Debt:

Approximately 10% of a credit score may be based upon how much new debt a consumer is incurring. A credit score may be negatively impacted if someone has recently applied for a number of new credit accounts. Promotional inquiries usually do not negatively impact a credit score. credit repair

Types of Credit in Use:

Approximately 10% of a credit score may be based upon the types of credit currently in use by a consumer. A credit score is usually negatively impacted by loans from finance companies. When a lender receives a credit score from the credit bureau, there will be reasons included that explain the score. If the lender rejects a request for credit, and the credit score was part of the reason, the reasons help the lender explain why the score was not higher. Credit score reasons are also useful in determining whether or not a credit report contains errors and/or how a consumer's credit health might be improved.