What is a Credit Bureau Score,
and how is it calculated?
Credit bureau scoring is a scientific way
of assessing how likely a borrower is to
pay back a loan. A Credit Bureau Score
is based on the data available in the borrower's
credit report. The score measures the relative
degree of risk a potential borrower represents to
the lender or investor. It is not a
measure of a borrower's income, assets, or bank account,
although those and other factors are still considered by
lenders and investors, independent of the score.
Fair, Isaac Credit Bureau Scores range from approximately
450 to 850 points, and are available through the three
national credit data repositories (Equifax, Trans Union,
and TRW). The scoring programs reside at these credit
bureaus and are called:
This score is calculated at the repository, and is based
solely on the data within that repository's individual
credit file.
A Fair, Isaac Credit Bureau Score, sometimes referred
to as a FICO score, is calculated by a system of scorecards.
In developing these 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.
Through this process, Fair, Isaac identifies
distinctive credit patterns. Each pattern
corresponds to a likelihood that a consumer
will make his or her loan payments as agreed
in the future. The score is based on all the
credit-related data in the credit bureau report--
not just negative data such as missed mortgage
payments or bankruptcies.
The types of credit information used in the credit
bureau scorecards are typically the same items an
underwriter would use to make a credit decision.
These can include:
Fair, Isaac observes tens of thousands of credit report histories of mortgage borrowers to determine which credit report items or combination of items are the most predictive of future risk. This data indicates the amount each item should contribute to a credit decision.
The credit score ranges from 450-850. A score of
620-675 is approved for mortgage loan. A favorable score of 700 or better is approved for a better APR. One can still obtain a mortgage with 520
(depending on the lender and the rates may not be as favorable).
The credit score breaks down as follows:
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 house are also not
used in the scorecards. Any information that is
not present in a credit file is not used in
creating a Credit Bureau Score.
What does a score mean?
A Fair, Isaac Credit Bureau Score is a means
of rank-ordering potential borrowers based on the
likelihood that they will pay their credit obligations
as agreed. A higher score indicates better credit
quality. If all other things are equal, borrowers
with a score of 660 are less likely to default on a
loan than borrowers with a score of 580.
The Fair, Isaac Credit Bureau Score models at each
credit repository are of similar design and the
scores are scaled to indicate a similar level of
risk across all three bureaus. In other words, a
score of 680 at one bureau will represent the same
relative risk as a score of 680 from another bureau.
This risk is defined in terms of the number of
accounts that remain in good standing compared
to those that default.
How can a borrower increase their FICO score?
Over time a borrower can improve the information in his
or her credit report by paying credit obligations on
time and using credit wisely. As derogatory data in
the credit report gets older, it affects the score less.
A missed payment from four years ago will not count as
much as a missed payment from six months ago.
A credit score, like a credit report can be
thought of as a snap shot of an individual's
changing credit record. If a request is made
that another repository report be obtained to
get an updated score, then the score is likely
to change for many reasons; however, it is not
possible to control how that score will change.
The credit items on the report are updated often,
so new items are likely to have been added since
the previous report. Additionally, repeatedly
requesting a borrower's credit report may substantially
increase the number of inquiries on the repository report,
which may affect the score adversely.
Doesn't using the score mean fewer people will get mortgage loans?
No, in fact, the opposite may be true. Credit
Bureau scoring is just one of several ways that
lenders and the secondary market decide whether to
lend someone money, and under what terms. They set
the underwriting Guidelines. The lender typically
offers a mortgage product to the same number of
borrowers irrespective of the use of scoring.
The lender uses the Credit Bureau Score to determine
the acceptable level of risk for the product being offered.
If the score on a borrower's credit report is too low for
a given product, that does not mean the score is too low
for other products. In the past we have seen that once
lenders are able to accurately identify the credit risk
of all applicants, they can create products designed
and priced for various market segments, ultimately
extending credit to more people.
Suppose a score if affected by derogatory credit
information that the borrower believes is not his or hers?
Consumers who want to address what they believe is
erroneous information on a mortgage report should contact
the reporting agency which developed the report. As you
know, the Fair Credit Reporting Act (FCRA) allows the
credit reporting agency a "reasonable period of time",
generally not to exceed 30 days, to reinvestigate
consumer disputed items. A significant number of credit
grantors use an automated system for investigating disputes
and respond to the dispute within a few days. Most credit
reporting agencies make a special effort to resolve disputed
information affecting a mortgage decision. The lender can
weigh these factors and documentation
provided by the borrower.
If the derogatory information is removed,
how much will the score increase?
Because the score uses all the credit-related data
on the credit bureau report and takes into account
compensating factors, removing or changing one specific
derogatory item will not guarantee an increase in the
Credit Bureau Score. In some cases a change in the
credit bureau report would have little or not effect
on the score. And because there are many scorecards
using complex mathematical formulae at each of the
repositories, it is not possible for us to estimate
how much the score will change if specific derogatory
information is removed from the single repository report.
What would happen if an applicant were to pay off
balances and/or close some accounts?
It is not possible to ensure that scores would
increase in this case. Such actions may upset
the mix of available credit, and actually decrease
the score. It is important to remember that the
point of the scoring is not to calculate a debt
ratio--the debt ratio is still considered by the
lender independent of the score. The score reflects
data available on the credit report to assess the
consumer's current payment patterns as well as
payment history.