Some more info...
The Credit Scoring Model
What it is...
Okay, now on to the credit report scoring systems. The scoring model system came into being about nine years ago. The Fair, Isaac Company, developed it a computer software designer (hence the acronym "FICO").
The scoring system is licensed out to The Big Three credit repositories, which in turn call it by individual names to help differentiate which repository is issuing which score. Experian calls their score a FICO; Equifax calls theirs the Enhanced Beacon; and Transunion calls theirs the Empirica Model.
The score that each repository issues on their individual reports is a reflection of the information that repository has on an individual in their respective credit files. So, the score issued by each repository will usually be different from the other repository's scores. The primary repository will usually have the most accurate score, and if the borrower has had any credit problems over the past few years, the primary repository will usually have the lowest credit score.
However, it will sometime work in reverse - if the borrower has recently cleaned up his credit history, the primary repository will usually have the most accurate updates, and in that case, the primary repository may likely show the highest score.
You can look at two different repository's reports on a borrower, and in reviewing the credit profiles; you usually can see what differences in the credit information are likely causing the different scores.
How It Works
Using a complex matrix measuring over 30 different variables in an individual's credit profile, the Fair, Isaacs program converts the profile into a numeric score which is added to an individual's credit report. That score is a reflection of the computer a.ssigned credit risk for that individual. The intent is to reduce the amount of subjectivity credit decision makers (underwriters) inject into the risk analysis process. The most important variables for mortgage loans are as follows:
Derogatory Credit History
Liens or Judgements
Length of Credit History
Depth of Credit History
Proportion of Debt to Credit Balances
Amount of Available Credit
Generically speaking, the scores can run from 0 to 1,000. The highest I have ever seen is an 863. However, it is generally accepted that anyone with a 700 credit score is A credit, and over 720 is AA credit. Individual lenders technically a.ssign their own credit grades to the credit scores, but between various lenders they are usually pretty close as to what score constitutes what grade. Here is an approximation of the credit score/grade:
Score Credit Grade
720 and up AA
700 to 719 A
680 to 699 A-/B+
660 to 679 B+/B
640 to 659 B
620 to 639 B-/C+/C
600 to 619 C/D
580 to 599 D/F
579 and below F
It is important to recognize that these scores are not just about derogatory credit history. They are about determining credit risk a.ssociated with a particular borrower, and points are added or taken away based on many different factors related to your credit profile.
For example, once you begin start using credit accounts, you are usually going to have a credit score in the 565 to 580 range. Why so low? Well, you are just starting out, and you have no credit history to rate. Once you have 12 months of usage on your accounts, you will begin adding points to your credit history. Or if you mess up, you will destroy your credit quickly, and then you really face a tough uphill climb.
You are considered high risk when you start out, because you haven't really proven yourself yet. As you slowly build credit over a year's time, your score will start climbing. But now the paradox sets in. Each time you add a new credit account to your history, your score will drop. Why? Because you have added more debt to your credit load. However, once you have shown the ability to handle the new debt as well, your score will recover, usually in about six months. Once you have a 12-month rating on the new account, you will start having points added to your credit score.
Over time, you build your credit up by scoring points. To score points, you have to use credit, and your creditors have to report your accounts to the credit bureaus. Having a $200 tab at a local restaurant won't help you a bit, no matter how good your payment record is.
You also have to pay your bills on time. Every time you show a late pay, you lose points, and it takes an awful long time to recover them. Once you show 36 months of timely payment history on any account, you are earning the maximum points. Generally speaking, you will have an excellent credit score when you have four major accounts ($1,500 credit limits or higher) all with 36 months spotless payment history, and all usually maintaining balances that are at or below 60% of your available credit limits.
A mortgage rating will boost your score even further. You start collecting points on a mortgage at 12 months, and max out at 36 months. Obviously, this too is where you will lose the most points if you have any late pays on your mortgage history, and where it takes you the longest to recover any lost points.
Where you see scores in the 770 and up range, you will usually see about 8 to10 years history, with 3 to 4 revolving credit accounts that are rarely maxed out, a sterling mortgage history, and two or more major installment accounts (like car loans/leases) that have been paid off. If the report shows any late pays, it was likely a 30 day, one time, on a revolving account, over three years ago.
How about the guy who never misses a payment, always pays on time, and still only has a 640 credit score? Well, if he uses a lot of credit, it could be that he has too many accounts, and he carries high balances (over 60%) in relation to the credit limits. Or he could be making too many minimum monthly payments, instead of sizable payments. Or yesterday he had a 685 score, but today he has a new $25,000 credit card, with a new $20,000 balance on it. Or he has good credit, but he only has four accounts, no mortgage history, and three of the accounts are less than 24 months old.
The scoring model has weighted adjustments as well. The guy who has a strong credit history, and a lot of depth in his credit report, and blip... there pops up a 30 day late. Well, it's been 60 days since, and the late pay wasn't on a mortgage or a car loan, so he's probably going to lose about 3 points on his credit score. If it was a mortgage or a car loan, he will lose about 10 points.
The guy with the 660 score? He's probably going to lose about 10 points on a revolving account late... if it's a mortgage or car loan, he might lose as much as 20 points. At 620, the revolving late will cost him15 to 20 points, and a mortgage or car late could cost him a 30-point reduction in his score.
See, a computer can't tell if you are a deadbeat, or under financial strain, or just nonchalant about paying your bills on time. And it really doesn't matter what the reason is. All the computer knows is that if your score was already low, and you are making late payments, you are a credit risk - by giving you a low score, indicating you are a high credit risk, the credit report tells the next guy to loan you money that he is probably going to regret it!