If you are like most Americans you have either purchased or leased a car, rented an apartment, opened a charge account at a department store or purchased a home. In any or all of these transactions the credit grantor has probably run a credit report on you.
Your credit report will show the credit grantor a factual record of how you pay your bills. It is a historical record of payments for mortgage, installment loans, revolving charge cards, and any companies with which you may do business. Information from public records may also be placed on your credit report, such as tax liens, judgements, state and county court records, federal districts bankruptcy records and even overdue child support payments. When we run a credit report it, in fact, becomes a road map of a person's life.
As an application for credit is processed many factors are analyzed to ascertain the ability and willingness of the applicant to repay the contractual obligation. As stated, a credit report is an indication of how one will repay his or her obligations based upon past history.
To make the underwriting process, particularly for real estate loans, less driven by conjecture a scoring matrix has been developed by a company called Fair, Isaac & Co.. This Fair, Isaac Credit Bureau Risk Score "FICO" has been accepted by Freddie Mac and Fannie Mae, the two largest purchasers of home loans, as a predictor of mortgage performance.
So, what is a credit bureau score? Credit bureau scoring is a statistical means of assessing how likely a borrower is to pay back a loan. It is based on the data available at the time in the borrowers credit report. The score measures the relative degree of risk a potential borrower represents to the lender or investor (Freddie Mac, Fannie Mae or any other real estate investor in the case of real estate loans).
Interestingly, the score reported on a TRW (new name for TRW is Experian), Equifax or Trans Union credit report is not reflective of a borrower's income, assets and/or bank accounts. These factors, however, are still reviewed by lenders and investors, independent of the score.
The FICO score range is approximately 375-900 points. FICO scores are reported on your credit report through the three national credit data repositories (Equifax, Trans Union and Experian (TRW)). The score is calculated using a system of scorecards at the repository and is based only on the information at each of the credit reporting entities. In developing the scorecards, Fair, Isaac uses actual credit data on millions of consumers and applies complex mathematical methods to perform extensive research into credit patterns that forecast credit performance.
In other words, they looked at current files and studied the same files as they looked two years prior. What transpired over the last two years as to the payment history on these files became the criteria (credit patterns) upon which the scoring factors were established. Each pattern corresponds to the likelihood that a consumer will make his or her payments as agreed in the future. The score is based on all the consumer credit information in the credit bureau file not just the negative information such as missed mortgage payments, bankruptcies, or lates on charge cards.
Fair, Isaac Credit Bureau Scores do not use race, color, religion, national origin, sex, marital status or age as predictive characteristics. Occupation and length of time in present home are not used in the FICO scoring process. Only information in the repository is used. Next week: Low FICO scores and what can be done to raise your score.