Credit Score Models
score factors and other useful information
Credit score models; their role in the loan process.
You step into your bank's loan office with the intent applying for a loan.
After giving the required information, the bank will make an assessment of how much money they will be able to lend you. They will also determine what percentage rate you will receive and how long you may have to pay it back.
One of the ways they make this judgment is by your credit score, the measurement used to determine how much of a credit risk you are.
The biggest factor that the risk score determines is how likely you are to make a serious default in the next two years. Serious being a 90 day late payment.
What is of concern to the borrower is how that score is arrived at. Most consumers think they have one credit score when in fact they have many.
These credit risk scores are determined by the information that is kept at the credit reporting agency that is involved in providing information to the lender you are working with and by the credit score model that is used by that lender.
The agency will provide that lender a score using one score model to determine that score,
the bank then may use
- that number solely,
- or make a average with scores given from all three credit reporting agencies,
- or use one and add their own criteria or scoring system to arrive at the score they will use.
What you, as the borrower, are most concerned with will be what credit score models that lender is using.
Varying types of credit score models will use different criteria. More weight will be on some negative items that other credit score models may not be as concerned with.
Your bank additionally may deem certain aspects as more important than other areas that another lender will not consider as important.
One example:
You are looking for a large loan and your history isn't that varied (a mix of types of loans) and that may be something your lender is interested in seeing in a potential borrower.
Most lending institutions will use some sort of FICO score model, BUT that may not always be the case. Before you get too far into the process you may want to find out what credit score model they use and see how much information about that model you can get before it actually becomes an inquiry.
Note about inquiries:
Inquiries are just as they sound, inquiries into your credit. There are two types of inquiries.
The first type of inquiry is called a hard inquiry.
These are the ones you initiate yourself in the applying for credit process.
They usually result in shaving some points off your credit score. So doing a bit of homework on your part before involving yourself in the actual loan application process would be a good idea.
Additionally you want to keep those inquiries to a minimum as hard inquiries stay on the credit report for up to 2 years.
Unless it is a large purchase, such as a new car, a flutter of new inquiries is generally looked at as someone in a desperate search for additional money. Not an attractive look to a lender.
The second type of inquiry is called a soft inquiry.
These are made by credit card companies and others looking to extend offers to you. Also those inquiries you make yourself (checking on your credit report) are also considered soft inquiries and these do not have an impact on your score.
Score Cards and the score models
Once you know what credit score model your institution uses you may want to additionally know (if they will discuss this with you) if you will be part of a score card or I should say WHAT score card you may be on.
The score card is a grouping of similar acting consumers. An example of a category would be those that have at least one or two 30 day late payments on their history.
Most credit score models use several scorecards. This is looked at as making the process more predictable. To the one lending this is the most advantageous to them.
In business there is always going to be losses somewhere and having a system in place to predict those losses is valuable.
For the borrower what this means you will be grouped with those of a similar history and if you look better than others in that category your credit score could be higher.
Overall the more of a loss you appear to possibly be, either the loan will be denied or the rate will be high to cover the possible losses incurred with a risky transaction!
If you are part of a risky category and you rate higher than others in that category most likely you will not be denied the loan but you will likely receive a higher percentage rate.
On the other hand....
If your score and information used to determine that score match the favorable criteria level they have in place, your interest rate will be low.
Many times, as previously discussed, large banks will have their own credit scoring models with their own formula in place and use a third party scoring model together with it. Again, usually a FICO product.
It is noted that these credit scoring models must not use biased information as part of the report such as:
sex, race, religion or marital status.
FICO products being the largest based (most products) and considered the standard and most predictive, many other credit scoring models try to copy these.
The ones that mimic the FICO product (many call these FAKO scores) may still be a good judge of what your credit worthiness may be but they also are not usually what your lender is using.
Some of these mimickers are Experian's plus score and scorex. While these are good way to get a general idea of where you stand if you've never looked at your score, if you are in the market for a large loan or mortgage you will want to get the "real thing" that your lender will be using.
Knowing what the credit score model and score card you are on OR if you are on one of the proprietary credit score models of your lenders' is important to know before the loan process.
In the case of a proprietary situation the loan officer you are dealing with will hopefully be able to explain that and what is important to that situation.
Use that information to improve your score, or decide if indeed that is the institution you wish to work with.
When conditions are not favorable
If upon receiving your credit score and a negative action does occur (a loan denial) the law requires the lender to state what reasons lead to the denial.
There is a reason code that is standardized across all credit score models.
Here is a partial listing of reason codes that may be used when you are denied credit or not given quite the loan you were looking for.
CODE Explanations
02.............. Level of delinquency on accounts
03.............. Too few bank revolving accounts
04.............. Too many bank or national revolving accounts
05.............. Too many accounts with balances
06.............. Too many consumer finance company accounts
07.............. Account payment history is too new to rate
08.............. Too many inquiries over last 12 months
09.............. Too many accounts recently opened
10.............. Proportion of balances to credit limits is too
high on revolving accounts
11.............. Amount owed on revolving account is too high
12.............. Length of time revolving accounts have been
established
13.............. Time since delinquency is too recent or unknown
14.............. Length of time accounts have been established
15.............. Lack of recent bank revolving information
16.............. Lack of recent revolving account information
17.............. No recent non-mortgage balance information
18.............. Number of accounts with delinquency
19.............. Too few accounts currently paid as agreed
20.............. Length of time since derogatory public record
is too short
21............... Amount past due on accounts
22............... Serious delinquency, derogatory public record
or collection filed
23............... Number of bank or national revolving accounts
with balances
24............... No recent revolving balances
28............... Number of established accounts
30............... Time since most recent account opening is too short
31...............Too few accounts with recent payment information
32............... Lack of recent installment loan information
33............... Proportion of loan balances to loan amounts is too high
34............... Amount owed on delinquent accounts
38............... Serious delinquency, and derogatory public
record or collection filed
39............... Serious delinquency
40............... Derogatory public record or collection filed
Using these reason codes you can correct the problems and hopefully wait for your credit score to go up before applying again.
The following info I found online in a discussion board over a proprietary credit score model of a financial institution. It's important info that institution uses in addition to the fico score.
2) Length of time since 1st loan
3) How many loans or credit cards
4) How long ago did one open a new credit card or loan
5) How many loans or cc currently have a balance
6) total amount of balances (not including a mortgage)
7) number of months since last missed payment
8) Longest time of a delinquent payment
9) number of loans/credit cards past due at this time
10)Percent of total credit card limits that current balances credit card's represent
11) Any judgments such as bankruptcy, tax liens, repossession, or collections
12) How long ago did #11 occur
Though knowing what credit score models your lender may be using certainly is helpful in fine tuning any repair work on your credit, the bottom line is the credit report is the underlying basis for those credit score models that lead to your credit score. The bulk of work to improve your credit score exists there.
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