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“Our existence is dedicated to developing the strategies and implementing the tactics that enable our clients to pay for their homes
as quickly as possible, rave to their friends about their credit scores, and to have fun doing so.
We strive to accomplish this in a manner that is profitable, will make our parents proud, protect our client’s privacy, and drive our
competitors insane!” |
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| Understanding Credit Scoring |
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In the United States,
a credit score is a number based on a statistical analysis
of a person’s individual credit files to represent
the credit worthiness of a person and the likelihood that
the person will pay their bills.
FICO is an acronym for
Fair Isaac Corporation (traded publicly under the symbol
FIC) and refers to the best
known credit
score in the United States. The FICO score is primarily
used in the consumer banking and credit industry. Banks
and
other institutions that use credit scores as factor in
their lending decisions may deny credit, charge higher
interest rates,
or require more extensive income and asset verification
if the applicant’s credit score is low.
FICO scores
are designed to indicate the likelihood of a borrower
being delinquent with the next 24 months.
The three major
credit reporting agencies(Equifax, TransUnion, and Experian)
calculate their own credit scores, which
go by different trademark names as well as many different
versions of the score. Beacon, Beacon 5.0, Beacon 96.
and
Pinnacle are all available only from Equifax; Empirica,
Empirica Auto 95, and Precision 03 at TransUnion; and
Fair
Isaac Risk Score at Experian.
The scores use a multiple
scorecard or template design and each version uses 10
or more individual scorecards
(for example,
a borrower with two 30-day late payments will be scored
against a population with some minor delinquencies).
An
individual is then graded according to what variables
seem to indicate the repayment risk in that group.
The
statistical models that generate credit scores are subject
to federal regulations. The Federal Reserve Board’s
Regulation B, which implements the Equal Credit Opportunity
Act, expressly prohibits a credit scoring model from
considering any prohibiting basis such as race, color,
religion, national origin, sex, or marital status.
Although
the exact formulae for calculating credit scores are
closely guarded secrets. Fair Isaac has disclosed
the following components and the approximate weighted
contribution of each: |
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35% punctuality of payment in
the past (only includes payments later than 30 days
past due) |
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30% the amount of debt expressed as the
ratio of current revolving debt to total available
credit. |
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15% length of credit history |
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10% types and number of credit accounts
used (installment, revolving, consumer finance) |
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10% recent search for credit and/or amount
of credit obtained recently |
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Of course, bankruptcies,
foreclosures, and judgments affect scores dramatically.
FICO
scores generally range from 300 to 850 and lenders will
check the applicant’s score from each bureau
and
use the median score to determine the applicant’s
credit worthiness.
Additionally, credit scores are used
in determining prices for homeowner’s and automotive
insurance. |
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