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Understanding FICO Credit Scores

Each reporting agency develops different models for different purposes.

The information on this page should not be construed as the most current or even accurate. It is likely that the following information may not apply to your situation or it may be out of date. Credit scoring is a dynamic process that is constantly improving with new technology. The purpose is to show just some of the basic mechanics involved in arriving at a credit score for a home loan.

This page is a generic historical view of the credit scoring system used in the mortgage industry. This is not the same system used for the auto industry or the retail version of consumer credit reports. The credit reports ordered directly by consumers uses a similar system that may not always reflect the exact same score as the score given to mortgage companies. Recently a borrower ordered their own consumer credit report online and obtained three scores that were much higher than our credit scores obtained during the same. Each model is different.

The following chart shows an example of the factors and points used in calculating your credit score. Each reporting agency uses their own proprietary system of scoring. It is written that credit scores in the past could range from 250 to 900 depending on the credit reporting agency and type of credit report required. The "PLUS SCORE" developed by Experian, we are told ranges from 330-830.

The system we follow; Fair Isaac, "FICO"

- the scores currently range from 300 to 850.

CREDIT SCORING CHART
The big three credit reporting agencies		Experian	Trans Union	Equifax
Initials of Big Three Credit Reporting Agencies		XPN	TU or TRU	EFX
Trade Names variations for scoring systems		Fair Isaac	New Empirica	Facta Beacon 5.0
Trade Names variations for scoring systems		FICO	FICO Classic 98	Facta Beacon 5.0
"A" Paper borrowers will have most factors from this range and occasionally, some from bottom range.	Amount owed on accounts is too high	1	1	1
	Delinquency on Accounts	2	2	2
	Too few bank revolving accounts	3	N/A	3
	Too many bank or national revolving accounts	4	N/A	4
	Too many accounts with balances	5	5	5
	Consumer finance accounts	6	6	6
	Account payment history too new to rate	7	7	7
	Too many recent inquiries last 12 months	8	8	8
	Too many accounts opened in last 12 months	9	9	9
	Proportion of balances to credit limit too high	10	10	10
	Amount owed on revolving accounts is too high	11	11	11
	Length of revolving credit history is too short	12	12	12
	Time since delinquent is too recent or unknown	13	13	13
	Length of credit history is too short	14	14	14
	Lack of recent bank revolving information	15	15	15
"B" Paper borrowers might have several factors from this range and some from top range as well.	Lack of recent revolving account information	16	16	16
	No recent non-mortgage balance information	17	17	17
	Number of accounts with delinquency	18	18	18
	Too few accounts currently paid as agreed	19	27	19
	Time since derogatory public record or collection	20	20	20
	Amount past due on accounts	21	21	21
	Serious derogatory public record or collection	22	22	22
	Too many bank or revolving accts with balances	N/A	N/A	-23
	No recent revolving balances	24	24	24
	Proportion of balance to loan amounts too high	33	33	33
	Lack of recent installment loan information	32	4	32
	Date of last inquiry too recent	N/A	19	N/A
	Time since last account opening too short	30	30	30
	Number of revolving accounts	26	26	26
	Number of bank revolving or revolving accounts	N/A	26	N/A
	Number of established accounts	28	28	28
	No recent bankcard balances	N/A	29	N/A
	Too few accounts with recent payment information	31	N/A	31

Fico Scoring Explanation

The agencies use a complex formula that references the points for each factor shown above that applies to your credit.

Borrowers with perfect credit will still have deductions. The credit bureaus do not disclose the entire process of calculating your credit score.

The sample factors below are the only part of the formula that is publicly disclosed. Mortgage credit reports usually show the top four factors.

A mortgage lender will look at the section with

the credit scores and pick the middle number.

"High, Low, Middle."

Not an average of the three ... the middle score.

This is your score for home loan purposes. The middle score in this sample below is 769. This is an example of excellent credit.

This is a sample of the bureau score information

on a typical credit report

It may include a list of top four factors in calculating your score

Credit Bureau Source, Credit Score

XPN - Experian / Fair, Isaac Model 780                     < High Score
-10 Proportion of balances to credit limit too high
-14 Length of credit history is too short
-08 Too many recent inquiries last 12 months
-09 Too many accounts opened in last 12 months

TUC - Trans Union / New Empirica 761                       < Low Score
-05 Too many accounts with balances
-28 Number of established accounts
-10 Proportion of balances to credit limit too high
-12 Length of revolving credit history is too short

EFX - Facta Beacon 769                                         < Middle Score
-04 Too many bank or national revolving accounts
-10 Proportion of balances to credit limit too high
-05 Too many accounts with balances
-32 Lack of recent installment loan information

The following credit bureaus provide the credit scores to

mortgage lenders:

Addresses for retail or other industry inquiries may be different.

Experian
P.O. Box 2002
Allen, TX 75013-3742
(888) 397-3742

Name of Score: EXPERIAN/EXPERIAN/FAIR, ISAAC MODEL/ FICO
Range: 250-900 (Old information/ not verified)

Name of Score: FICO
Range: 300-850 (Old information/ not verified)

Name of Score: PLUS SCORE (consumer version developed by Experian)

Range: 330-830 (From recent consumer credit report disclaimer)

Trans Union
P.O. Box 1000
Chester, PA 19022
(800) 916-8800

Name of Score: TRANSUNION/FICO CLASSIC 98/ old name, New Empirica
Range: 336-843 (Old information/ not verified)

Equifax
P.O. Box 740243
Atlanta, GA 30374
(800) 685-1111

Name of Score: EQUIFAX/FACTA BEACON 5.0
Range: 300-850 (Old information/ not verified)

What is a Credit Score?
A credit score is a rating used by a lender to help determine whether you qualify for a particular credit card, loan, or service. Based on information in your credit file, the credit reporting agency analyzes your information using a complex mathematical model to yield your credit score. Most credit scores estimate the risk a company incurs by lending you money or providing you with a service -- specifically, the likelihood that you'll fail to make payments in the next two to three years.

The higher the score, the less risk you represent.

Your score is calculated by a mathematical equation that evaluates many types of information found in the credit file. Many different formulas are used to calculate credit scores, but most are based on the following factors, which each scoring model weighs differently:

Payment history

If you have a habit of late payments on your current and past credit accounts it will lower your score.

Public records

Your public record such as bankruptcies, judgments, and collection items may lower your score.

Amount owed

Owing too much will lower your score, especially if you're approaching your total credit limit.

Length of credit history

In general, a longer credit history is better.

New accounts

Opening multiple new accounts in a short period of time may lower your score.

Inquiries

Whenever someone else gets your credit report -- a lender, landlord, or insurer, for example -- an inquiry is recorded on your credit report. A large number of recent inquiries may lower your score.

Accounts in use

The presence of too many open accounts can lower your score, whether you're using the accounts or not.

FICO SCORE Formula

We recently read a report that may give you an insight to the calculations in your score. The following information may be considered an illustration of the complexity used in credit analysis and not a "how-to" blue print for improving your scores.

We understand from one source that, Fair Isaac divides various portions of your credit history from the big three credit bureaus into five large categories. The categories may contain data with up to twenty-two different pieces of on-going information from each person with a credit history.

Mathematical formulas divide the importance of the information into a final score with a break down similar to this:

Your past record or history of paying your credit cards on time is vary important and represents up to 35% of the final score.

The amount of debt represents around 30% of your score.

The length of your credit history that can be verified adds up to 15% of your score.

The amount of recent or new credit will factor about 10% of your score.

We don't know how much weight is given to paying your mortgage on time compared to paying your car or credit card on time. We have read that the

types of credit used impacts the score by about 10%.

The good news for many borrowers, is that your income represents 0% of your credit score. The credit bureaus do NOT have access to your income.

It is also interesting to note that only

10% to 15% of all borrowers have FICO SORES over 800.

Bottom line...pay all your bills in a regular timely manner following the terms given by the creditor. Obtain only enough credit to manage your financial affairs in a reasonable way. Plan your purchases. Limit the inquiries. Make it a lifetime goal to persistently pay down your debt ahead of the creditors schedule.

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