FICO and Credit Scores Explained

Everything you want to know and MORE!

Your credit report affects more than your financial life. It could affect your education and even your love life. That's because your credit report is used not only by lenders, but insurers, potential employers and even some education institutions.

To learn the Ins & Outs for financing a Purchase of a New Home or Refinancing your existing one, please continue.

It pays to keep an eye on your credit and pay your bills on time. Also it pays to know how the system works.

How do you Score?
While your credit report is the basis for all these appraisals, many financial institutions judge you by an even more important number that has been developed from the information on your credit report: your credit score. For years, this number was a highly guarded secret. Now, however, the secrecy is being lifted - in part due to the considerable prodding by consumer groups and Congress. Fair, Issac & Co., the California company that originally developed this tool, is working with Equifax, the big credit bureau, to make the data available.

Fair Isaac - nake for its founders - created its FICO scores to help lenders gauge the likelihood of a long being repaid. Over the past 25 years, the scoring process has become so sophisticated that at least 75% of all mortgage lending approvals are based in party on a FICO score. But while your credit report is a fairly straightforward compilation of your payment history on all credit accounts, the FICO score is a compilation algorithm - or computerized model - that evaluates many factors from your credit report in different weighting combinations.

Thus, your credit score could be exactly the same as your neighbor's, but completely for different reasons. And that credit score is only one factor in granting a loan. For example, two people with the same credit scores might apply for mortgage with the same lender. One applicant has a 20% down payment, while the other is planning to put only 10% down. Or one is applying for a jumbo mortgage, while the other needs only $150,000 loan. Those additional factors will also affect the credit decision.

The availability of FICO scores to consumers, along with online credit reports, means you have new ways to check on your financial status - and to protect or improve it. But first you must understand these reports, along with your rights to know and your ability to affect the information on them.

Your Credit Report
Three major credit reporting bureaus keep track of hte credit reports of millions of Americans. They are: Experian, Equifax, and Trans Union. Typically, all have the same information, except that some companies are stronger in certain geographic areas and thus may receive reports on your credit status from local merchants.

Information about all your existing - and past - credit accounts, ranging from credit cards to mortgages, student loan repayments, and even some local merchants accounts - is reported to these credit bureaus. Judgements, liens or bankruptcies are picked up by the credit bureaus from public records. Your report also gives your current and previous addresses, your employers and any other names you have used recently.

Separately, one or more of these companies may also provide investigative reports, typically used by insurance companies. The reports include public medical records and even interviews with your neighbors about your lifestyle! But your standard credit report covers only the public, financial aspect of your life.

Your credit report is not generated until someone - either an authorized credit-granting merchant user or you - request to look at it. Then the computer pulls together all this information, along with the credit bureau's explanation of its system. Your credit report shows your payment history and your outstanding balances on each account, as well as the maximum line of credit available. If you've been late on one or more payments, it will show up on your credit report, as well as any charge-offs (accounts that have been written off as uncollectable). And your credit report also reveals any inquiries that have been made recently, whether by merchant, lender or yourself.

If you see incorrect information on your credit report - such as an account that was closed, or one you have never opened - you should contact the merchant immediately, as well as the credit bureau that reported it (1 of 3 bureaus). Only the initiating merchant can make a correction. But you can initiate a dispute with the merchant by contacting the credit bureau. They'll contact the merchant and expedite the resolution to your problem. If you've been the victim of 'identity theft' - someone has used your name and Social Security number to open accounts - the credit bureau will 'flag' your name and stop new accounts from being opened.

If, after investigation, you still dispute an item on your credit report, you also have the right to post a short explanatory statement that will be sent to anyone requesting the report. You can do this online or by mail. It's better to resolve disputes directly with the merchant instead of letting bills go unpaid. That could ruin your entire credit report.

Most negative information stays on your credit report for seven years; a bankruptcy and related information stays on your report for ten years. But lenders often take an interest in your most recent payment patterns. So even after a bankruptcy, if you can get a secured credit card (backed up by, say, a savings deposit at the issuing institution) and make regular and on-time payments, you can rebuild your credit without waiting seven or ten years.

Your Credit Score
While your credit report is a direct reflection on your financial activities, your credit score is, as we've said, a complicated analysis of the patterns of your financial life. All the information used to create your FICO score is drawn from your credit report.

Credit scores range from 300 to 900. Only about 11% of the surveyed population ranks above 800; 29% ranks between 750 and 799. What most lenders look for is a middle score of the three bureaus. 680 would be good. Anything over 680 would be exceptional.

There are dozens of variables that go into creating your standard FICO score. Then, individual lending or credit-granting institutions may tweak the formula to create customized scores that emphasize one or another variable. Some of the most heavily weighted variables in the credit score are:

• Past Payment History. Fair Isaac believes that past performance is the single biggest predictor of how likely you are to pay bills in the future. Being 30 days late a few times and then catching up is less significant that if you've been three or four months late. You'll get a higher score if your payments have been current recently and any late payments were years ago.
• Balances Outstanding. The FICO score heavily weights the total amount of balances outstanding, and the percentage of your credit limit that you are using on each card. So consolidating all your outstanding debts on one or two cards, and cancelling the others, while a good money management strategy, might actually lower your FICO score.
• Financial Stability. Your credit stability score is based on three factors: the length of time you've had the same open accounts, the mix of credit you already have, and the number of recent credit applications. It helps to have not only a credit card payment history, but also an auto loan or installment loan. Not having at least one credit card will significantly lower your score. On mortgage loans, the automated programs of Fannie Mae and Freddie Mac also factor in the criteria like the length of time you've held your current job, and how long you've been at your current residence.

There's obviously no one thing that you can change quickly to improve your credit score, but paying your bills on time sure helps.

Great American's Hints for Home Loans

1. Make sure creditor is reporting the correct high credit limit.
2. To raise score: Try to keep credit balances on credit cards down to approximately 35% of your high limit.
3. If your payment history is excellent, do not close a good account just because you have a zero balance.
4. If you are going to purchase or refinance a home in the near future, do not buy or lease a car, boat or truck. Do NOT combine credit cards. Call (805) 374-6000 and find out what to do - for FREE! Yes FREE Custom Consultations!

"First the loan,
            then the home"