Myths and Misconceptions of Credit Scoring – Part 3 of 3

Jamie Preidt, Branch Manager
In part 3 of of our credit scoring series, we will examine Credit Score Factors and credit scoring contacts.  This credit scoring series is brought to you by Exit Home Team Realty of Statesville North Carolina and Allied Home Mortgage Capital Corporation.

 

CREDIT SCORE FACTORS
There are five main categories of information that credit scores evaluate.  They are listed in order of importance and weight of impact on your credit score.
  • Payment History– Approximately 35% of your score is based on this category.
    • Payment information on accounts such as Visa, Mastercard, American Express and Discover; retail department store accounts; installment loans; finance company accounts and mortgage loans.
    • Public record and collection items such as bankruptcies, foreclosures, wage attachments, liens, judgments and delinquencies reported to collection agencies.
    • Details on late or missed payments (delinquencies) and public record and collection items, specifically focusing on how late they were, how much was owed, how recent and frequency of the occurrence.
    • How many account show no late payments.
  •  Amounts Owed – Approximately 30% of your score is based on this category.
    • The amount owed on all accounts.
    • The amount owed on different types of accounts.
    • Whether you are showing a balance on certain types of accounts.
    • The number of accounts with balances.
    • How much of the total credit line is being used on credit cards and other revolving credit accounts.
    • How much of the installment loan accounts is still owed, compared with the original loan amounts.
  • Length of Credit History – Approximately 15% of your score is based on this category.
    • How long your credit accounts have been established.  The score considers both the age of your oldest account and an average age of all your accounts.
    • How long specific credit accounts have been established.
    • How long it has been since you used certain accounts.
  • New Credit – Approximately 10% of your score is based on this category.
    • How many new accounts you have.
    • How long it has been since you opened a new account.
    • How many recent requests for credit you have made, as indicated by inquiries to credit reporting agencies in connection with transactions initiated by you.  The score does not take into account requests a creditor has made for your credit file or score in order to make a pre-approved credit offer, or to review your account with them, nor does it take into account your request for a copy of your own credit file.
    • Length of time since creditors made credit file inquiries.
    • Whether you have a good recent credit history, following past payment problems.
  • Type of credit use – Approximately 10% of your score is based on this category.
    • What kinds of credit accounts you have and how many of each.
CONSUMER RIGHTS
As a consumer, you have the right to have credit bureau file be reported accurately.   There are three major credit bureaus:
Experian:
888-397-3742
Transunion:
Transunion Consumer Solutions
PO Box 2000
Chester, PA 19022-2000
Equifax:
PO Box 740241
Atlanta, GA 30374
If you are denied credit at any time, your lender must notify you within thirty days of the reason for credit denial.  They must also provide you with the name and contact information of the credit repository used in the credit decision.
You can then contact the credit bureau and request a free copy of your credit file in order to review it and its accuracy.  Upon finding any erroneous information, you can then request the bureau validate the inaccuracies.  They have thirty days to confirm the information and correct or delete any errors on your file.
DID YOU KNOW………..
  • That a credit score predicts the likelihood that an applicant will have a 90 day late in the next 24 months.
  • Most negative credit must be removed from credit bureau files after 7 years.  Exceptions include bankruptcy which can continue to appear on reports for up to 10 years.
  • Inquiries remain for 2 years.
  • Paid off accounts without negative information remains for up to 10 years.
  • The average credit score in the USA is 686 while the mean score is 720.
  • There must be activity within the past 6 months to post a credit score.
  • The typical credit scoring models uses these factors:
    1. 35% Past Payment History – model looks at last 24 months w/most recent 6 being most important
    2. 30% Balances – revolving credit balances are compared to high credit.
    3. 15% Credit History – how much credit has been obtained historically.
    4. 10% Inquiries – Mortgage and auto inquiries pulled within 30 days count as one.  After 7-10 inquiries within 12 months there is no impact on the score.
    5. 10% Types of Credit – Mortgage debt is weighted most heavily and finance company debt is viewed negatively.
Sonya Leonard, GRI, ABR, RealtorExit Home Team Realty704-450-0588www.SonyaLeonardHomes.comwww.StatesvilleRealEstateGuide.com for Statesville Home Listings

 

 Statesville NC Real Estate, Statesville NC Sonya Leonard of Exit Home Team Realty is your local real estate expert in Statesville North Carolina.  Specializing in working with buyers and sellers of Residential homes and land.  The Statesville Real Estate Guide provides free access to individualized home searches for all homes in Statesville, Mooresville, Troutman, Lake Norman and the entire Lake Norman Area.  Explore buyer and seller reports, community resources, new home communities and be sure to sign up for your personal home search.  Let Sonya help you INVEST in Real Estate and you Future!

Myths and Misconceptions of Credit Scoring – Part 2 of 3

Jamie Preidt, Branch Manager
In part 2 of of our credit scoring series, we will take a look at 8 more myths.  This credit scoring series is brought to you by Exit Home Team Realty of Statesville North Carolina and Allied Home Mortgage Capital Corporation.

 

Myth 3:
The Lender has nothing to lose; they have my home as collateral if I don’t pay

 

 The lender does not make the loan decision based upon the fact that the loan is collateralized.  The lender is not in the business of owning people’s homes if they don’t pay.
A lender will never make a loan knowing the person will not or could not pay it back as agreed.  To a bank, a foreclosure is a black mark and considered a failure of their lending practices.  A non-performing loan takes major collecting efforts, is expensive, and hurts the profit of the bank.
Loan performance is measured and managed very carefully and is a reflection of the banks lending expertise.  The lender will only approve a loan they know with a high degree of certainty will perform profitably.  The loan is only secured with collateral for the sole purpose of recovering they money if the loan does go bad.  This is strictly the recourse of last resort.
Myth 4:
Every time my credit is checked, my score goes down.

 

Any inquiry you make directly to the credit bureau does not affect your score at all.  Additionally, an inquiry by a creditor who is managing an account with you, inquiries by employers, and inquiries for pre-approval solicitations do not affect your credit score.
The only inquiries that affect your score are those that you authorize when applying for new credit.  The impact of a single inquiry on your score is minimal; in fact, an inquiry carries the smallest weight of all the score factors.  Normally, you can expect two to five points off your score, although it can range up to 50 points in those rare cases when a person has little other activity in the credit file.
Myth 5:
It hurts to shop around when applying for a loan because of the multiple inquiries.

 

When you are shopping for auto or mortgage financing, all inquiries within a 14 day period only count as one inquiry.  Furthermore, that inquiry does not show up on your score for 30 days.  You are given this 30 day buffer in order to shop and in most cases you will already have loan approval by the time the inquiry affects your score.  The key to shopping for a loan is to concentrate the inquiry into a two week period whenever possible.
Myth 6:
Accumulating too many inquiries hurts my score.

 

Any and all inquiries after 10 in a 12 month period will have no additional negative effect on your score.  Another way to look at this is if you have 30 or 40 inquiries in a year, that will have the exact same effect as someone who has 10 in that same period.  In other words, ten inquiries in 12 months is a cap on the negative impact of the number of inquiries.
Myth 7:
I can raise my score by shutting down some accounts.

 

Shutting down an account will never bring up your score.  In fact, in many cases, this will hurt your score.
The FICO credit scoring system measures the ratio between your overall credit limits to your outstanding balances.  By shutting down an account, you in effect lower the available credit and in doing so, you raise your credit balance to credit limit ratio.  This will negatively impact your credit score.
Myth 8:
If I shift my credit card balances to one or two cards an pay off others it will raise my score.

 

A maxed out credit card or line of credit impacts your score negatively.  By shifting money from 5 or 6 accounts that have low balances over to one or two accounts, and thereby maxing them out, this will negatively affect your score.
The ideal number of credit card accounts is between two and four cards with very low active balances that are paid as agreed.
Myth 9:
When applying for a loan, I should pay off all collections in order to get my score up.

 

Paying off collections could hurt your attempts to get the loan especially if it is an old public notice or collection account.  The FICO scoring system measures any recent derogatory activity in your file.  If you pay off a three year old collection that has in effect seasoned out its impact on your score, you then re-activate that derogatory account and this will negatively affect your score.
Always check with your lender or mortgage broker before taking any action of this kind.  If your goal is to obtain a loan in the near future, often it is better to pay off those old collections out of the proceeds of the loan, or bring money to the loan closing any pay them off as a condition of the closing.
Myth 10:
If I open up new lines of credit at lower rates, this improves my score.
In most cases, this is not true.  The credit scoring system measures the types of accounts in your file as well as the age and history of use.
The average age of your overall credit file is measured and will affect your score.  By opening up new lines of credit, you reduce the overall average age of your file and this will bring down your score.  Likewise the type of credit you open has an impact.  Multiple consumer finance accounts will score less positively than a major credit card or an installment loan at a bank.
 
Sonya Leonard, GRI, ABR, RealtorExit Home Team Realty704-450-0588www.SonyaLeonardHomes.com

www.StatesvilleRealEstateGuide.com for Statesville Home Listings

 

 Statesville NC Real Estate, Statesville NC Sonya Leonard of Exit Home Team Realty is your local real estate expert in Statesville North Carolina.  Specializing in working with buyers and sellers of Residential homes and land.  The Statesville Real Estate Guide provides free access to individualized home searches for all homes in Statesville, Mooresville, Troutman, Lake Norman and the entire Lake Norman Area.  Explore buyer and seller reports, community resources, new home communities and be sure to sign up for your personal home search.  Let Sonya help you INVEST in Real Estate and you Future!

MYTHS AND MISCONCEPTIONS OF CREDIT SCORING – PART 1 OF 3

Jamie Preidt, Branch Manager

MYTHS AND MISCONCEPTIONS OF CREDIT SCORING – PART 1 OF 3

Exit Home Team Realty of Statesville North Carolina in conjunction with Allied Home Mortgage Capital Corporation presented an informational seminar at the Iredell County Public Library this month on the Myths and Misconceptions of Credit Scoring.  Lenders have been stingy with their money (to say the least) and now more than ever, you credit score is critical to your financial stability.  There are many factors that contribute to your credit score and I would like to share this information with you in a 3 part Credit Scoring series.    In this part of the series, we will have an overview of credit scores and two of 10 myths associated with them.

MYTHS AND MISCONCEPTIONS OF CREDIT SCORING

  Credit Scoring is a snap shot of your credit file at a specific point in time.  It is a statistical analysis and predictive assessment of the likelihood that you will pay your creditors as agreed.  Credit Scoring has been in widespread use since the mind-1990s and it is used by lenders to assess their risk when considering lending someone money.
Knowing your credit score and which activities affect it is vital to your financial success.  Your score will determine whether or not you can borrow money and at what cost.  Therefore, it is important to evaluate and decide if you should attempt to raise your scores before you apply for a loan.  You should also consider how this new loan will affect your credit scores.
RISK BASED PRICING

The higher the risk and greater the responsibility the lender must assume, the higher the rate you will have to pay.

FICO credit scores range from 350-850 and the higher your score the better credit risk you pose to the lender.  The interest rate you will pay and the terms of the loans you can qualify for are set largely based upon your credit score.  When you obtain financing, you are paying the lender for the:
1.) Cost of Borrowing which is their cost of funds plus profit for bringing the funds to you at the retail level.  This is referred to as their margin.
2. Risk they assume in lending their funds to you personally.  This is known as risk based pricing.  These two factors are figured into every loan decision and the individual pricing of each loan granted.

 

Myth 1:
Banks and Lenders are risk takers
Generally speaking, banks are by nature risk averse  Banks are experts and very adept at measuring risk.  The tallest buildings in most cities are banks because they know how to measure their risk and profit off of that assessment.  They are able to predict with a high degree of accuracy how much risk a particular loan presents to their institution.  They manage that risk by declining loan applications that do not meet their risk tolerances.  They price their margin of profit and set terms to appropriately secure their profits on those loans they do approve.   The most common form of securing a loan is through some sort of collateral, such as real property, a boat, or an automobile, etc.
 Myth 2:
Your Loan will be approved or declined based on your credit score.
Your credit score is just one piece of the overall approval decision.  Credit scoring in not underwriting.  A loan underwriter will certainly take into consideration your credit score and often it is used to set the interest rate pricing of your loan.
A person’s score is rarely, if ever the only consideration in the approval or denial of credit.  In a mortgage loan decision, the lender will look at four main contributing factors when underwriting the loan.
1.) Equity;  Your loan to value ratio will indicate how much of the homes value you are borrowing.  This is considered carefully in light of your credit history and is adjusted up or down in order to manage the lender risk in the loan.  The better your credit score, the more you can borrow against your collateral.
2.) Income;  your income to debt ratio will determine your capacity to pay back the loan as agreed.  Your job history and how your income is earned will also be considered.  Bonuses, commission income, self-employed borrowers, etc. will receive extra scrutiny.
3.) Credit; represents your willingness and historical record of paying your debts as agreed.  Your credit history is a reflection of your responsible use of credit and is weighted heavily in the loan pricing and approval of your loan.
4.) Benefit; or use of funds is considered in the loan decision.  Lenders today are more concerned about the “net tangible benefit” to their customers.  Is the loan going to really improve your situation, solve a financial problem, or further the family’s agenda?
These four considerations plus other compensating factors are all judged together as the underwriter views the whole credit package, in order to approve or deny a loan.
Tomorrow:  Part 2 of 3  (8 more myths and misconceptions of credit scoring)
 
Sonya Leonard, GRI, ABR, RealtorExit Home Team Realty

704-450-0588

www.SonyaLeonardHomes.com

www.StatesvilleRealEstateGuide.com for Statesville Home Listings

 

 Statesville NC Real Estate, Statesville NC Sonya Leonard of Exit Home Team Realty is your local real estate expert in Statesville North Carolina.  Specializing in working with buyers and sellers of Residential homes and land.  The Statesville Real Estate Guide provides free access to individualized home searches for all homes in Statesville, Mooresville, Troutman, Lake Norman and the entire Lake Norman Area.  Explore buyer and seller reports, community resources, new home communities and be sure to sign up for your personal home search.  Let Sonya help you INVEST in Real Estate and you Future!