Spring has sprung and in looking at your home you recognize that some fix up is necessary or an addition would be nice or monthly credit card bills seem to be coming every two weeks and you find yourself saying "Let's get out of this hole" or you just feel like buying a new car or motorhome with the possibility of having the interest deductible. It's time to think about refinancing. "But I have a perfectly good first mortgage with a low interest rate", you say, and don't want to refinance. "I want to check out a second mortgage or equity line of credit", you say. "What do I need?" You need a FICO score in most cases. As we discussed in the last issue, a FICO score is a numerical evaluation of your credit profile based on a scorecard developed by Fair, Isaac & Co.. Your interest rate is determined by your FICO score. If your FICO score is high your interest rate will be less than if your score is on the low side. Scores range from a high of 900 (haven't seen any yet) to a low of 375 (have seen scores in the mid four hundreds). Most lenders and investors are looking for scores in the range of 620-680 or more depending upon the program.
When the loan agent or processor runs a credit report, four risks scores will normally be reported on the credit report. The risk score numbers will correspond to Fair Isaac's "Credit Bureau Risk Score Factor Reason Codes". The numbers listed will be in order of importance as to the reason the score is low or not better than a reported high score. Many credit reports will list reasons such as: #18 (number of accounts with delinquency), #01 (amount owed on accounts is too high) or #38 (serious delinquency, and public record or collection filed). These are just three of the reasons we may find on credit reports.
Depending upon the credit bureau used to run a credit report you may find up to forty or forty-five different reasons for score justification (we will see only the four that most affect the score). These score reasons should be relayed back to you, the borrower, and with this information you can determine what you must do to raise your score over a period of time.
How can I increase my score?, is a question that is often asked, particularly if a lower score has had an impact on a loan interest rate or even precluded one from obtaining a loan. Over time a borrower can raise the score with the wise use of credit and the paying of credit obligations in a timely manner. Also, as any derogatory data gets older it affects the score less. Payment missed four or five years ago will not count as mush as a payment missed three or four months ago. A credit score is a virtual snapshot of a person's payment record as of the day the credit report is run. It is a moving record.
You will find that a report run through Experian (TRW) will have a different score than one through Equifax, each repository having different information on file. You will also find that a score will possibly change from day to day, since new information is added and other data is aging. One word of caution, however, regarding the running of your credit report on a frequent basis.
Be aware that as you run your report through any entity (other than directly through the repositories) your score will be lowered. Inquiries on a report will show that you may be shopping for credit and those inquiries may have an impact on your overall credit mix and profile. If you are shopping for an auto or home loan, your inquiries may be considered as a single inquiry, if the shopping occurs over a period of seven days for an auto loan or home loan. In many situations, the prime determinant whether one gets a loan will be the entire loan package with the FICO score being one of the factors of the underwriting process.