Credit Scoring... The Good, The Bad and The Ugly

About Credit Scoring

Most anyone who has obtained a home mortgage, car loan, credit cards, in the past 5 years or so has heard about credit scoring. How many of you have been told "your scores are great", or "if your score were 10 points higher, your rate would be better by 1/4 point"? Probably most of you.

We in the industry started to become aware of "scoring models", as they are called, as early as 1994. The use of scoring models in the mortgage industry came about as the major secondary market players, known as Fannie Mae and Freebie Mac, started to develop automated underwriting systems. They had been in use for a long time for auto lenders and credit card issuers.

The early creators of the automated underwriting systems felt that, if someone could go to a Mercedes dealership at 10 am and drive off the showroom floor an hour later with a $100,000 car (still more expensive than homes are in many parts of the country), they ought to be able to obtain a home loan the same way. The logic in this should be obvious... after all, cars are rolling stock, so they can disappear, they depreciate and usually people don't live in them. Houses are attached to a foundation, they usually appreciate and people usually live in them. Using that logic, the industry should be able to make the home buying process easier for everyone.

This theory sounds good, but it is only in the last year that we have seen some relief from the mountains of paper that go into loan files, and it is because the scoring models have become more refined. Still, there is progress yet to be made and the industry is grinding slowly in that direction. Scoring models figure prominently in the future of how people obtain home mortgages.

Most people know that most creditors use credit report agencies for obtaining information on a person when they have applied for any type of financing. However, there are actually two levels of credit reporting agencies. There are three major repositories of credit and background information. They are Equifax, Experian and TransUnion. When someone obtains credit, the creditor reports the payment history to these repositories. This is usually done monthly but may be done on an irregular basis. These repositories simply accept the information as it comes in electronically and they DO NOT check the accuracy of the information.

The credit repositories and other agencies also maintain other background information on every person in the country who has a Social Security number or other identifying information. The other agencies may include the Department of Motor Vehicles, the Medical Information Board, the FBI, local law enforcement agencies, the county recorders for each county (public records repositories), etc. Even the mortgage industry has a central repository for borrowers and lenders who may have been involved in fraudulent activities in the making of mortgage loans.

Everyone wants a good credit score to help obtain automobile financing, credit cards and to purchase a home. What not everyone realizes is that improving your credit score can save hundreds, even thousands, in everyday living expenses.

Did you know that your credit score history can keep you from getting utility connections, good telephone rates, the best auto insurance, home owner's insurance or even keep you from getting hired?

Here are 7 ways a good credit score can save hundreds of dollars a month:

1.- A good credit score means lower home mortgage rates.

How much can you save? A 30-year, fixed rate mortgage loan of $150,000 with an interest rate of 5.72% costs approximately $870 a month. A poor credit score raises the interest rate to over 9% increasing the monthly payments for the same $150,000 loan to over $1,200 a month. A good credit score means you can save $330 each month or finance a more expensive house with the same income.

2.- A good credit score means lower insurance rates.

Many home owners insurance, auto and life insurance companies set minimum credit standards for their policy holders. This means that consumers with a poor credit score have to pay more for less coverage. In addition, many automobile insurance companies offer 25% discounts for credit scores over 625.

3.- A good credit score can help you get a job.

More and more employers run an applicant's credit report and take their credit score into consideration when trying to determine the type of person they are. Higher credit scores are equated to better integrity and character giving those candidates with higher credit scores a better chance of being hired.

4.- A good credit score can get you loans faster.

The higher your FICO score, the faster your loan is approved. According to myFICO, the median FICO score in the U.S. is 723. If, for example, your FICO score is above 750, you may be instantly approved for a loan with the best possible interest rate. That means if you are buying a home, you have a significant advantage over other buyers because you can close your loan faster. Sellers always prefer buyers with high credit scores because their mortgage application can close in hours instead of weeks.

5.- More credit is available to you.

A good credit score means more money in available at better rates. It also identifies individuals who are likely to perform well in the future. Lenders use credit scores to determine credit risk. The higher the credit score an individual has, the lower the credit risk to the lender so they are more likely to extend credit.

6. A good credit score can mean no utility company set-up fees.

If your credit report shows collection accounts for past due utility bills, you can be denied service. Also, if the utility company does agree to connect your service, they may require you to pay a larger deposit than other customers. Customers with particularly good credit scores may not have to pay a deposit at all.

7.- A good credit score can mean no telephone or cell phone start-up fees.

Consumers with low credit scores who sign up for phone service may be required to pay as much as $500 before starting service. A consumer with a good credit score rarely has to pay any deposits for home telephone or cell phone service.

Improving your credit score can lead to favorable interest rates, higher quality health, home and auto insurance, and the best mortgage financing available. MyMagicCredit.com ™ will work to remove negative, inaccurate, misleading or unverifiable items from your credit reports so you can begin to take advantage of the luxuries provided to those with higher credit scores.