Credit Scoring

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Credit Scoring
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What we will cover

• What is a credit score
• What factors determine a score
• What is a good credit score
• Cost of bad credit
• How you can find out your credit score
• Credit score myths
• Ways to increase your credit score
• Top 10 Dos and Donts during the loan process

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What is a Credit Score?

• A 3 digit number generated by a mathematical
  formula that is meant to predict whether a
  consumer will be a good payer or a bad payer.
• Most common credit software on the market is
  Fair-Isaac, known as FICO.

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The Credit Bureaus
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What the Score Means

• Each score is specific for each Bureau.
• Score predicts chances of default.
• Scores range from 300 to 850.
• Higher the score the less the odds of default.
  Result, better interest rates.

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Defining the Score!
850 Highest 720 Excellent 680 Good 620
Danger! Below 620 Needs Work
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Credit Score Factors
Length of History

• Payment History
• Late Pays
• Collections
• Charge-Offs
• Repossessions
• Foreclosures
• Tax Liens
• Bankruptcies
• Judgments

New Credit Soft Inquiries Hard Inquiries
Amounts Owed Credit Cards Mortgage Loans Auto
Loans HELOCs Installment Loans
Types of Credit Used A Mortgage Loan An Auto
Loan 2-3 Major Credit Cards
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What Factors Determine a Credit Score?

• 1. 35 Payment History
• Payment history includes collections, judgments
  and public records.
• Paying debt on time and in full has positive
  impact.
• Past delinquencies have negative impact. More
  recent delinquency, more of a negative effect.
• Past Dues destroy a score, can cost 50 points.
  Bring current immediately.
• A recent 30 day late can cost 50 points.

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What Factors Determine a Credit Score?

• 1. 35 Payment History (continued)
• Date of last activity determines score effect.
• 30 day late last month worse than 90 day late 3
  years ago.
• Paying a collection that is more than 2 years old
  can hurt a score.
• If paying off collection, ask creditor to
  permanently delete record.
• Missing low payments is better than missing high
  payments.
• Weight given pertaining to derogatory info
  serious delinquency, charge-offs, repossession,
  foreclosure and bankrutpcy.

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What Factors Determine a Credit Score?

• 2. 30 Amount Owed
• Debt ratio of outstanding balance to available
  credit is important. (Example 300 balance of
  1000 limit 30)
• Keep ratio below 50, 30 even better, ideally
  should be below 10.
• Balances should be kept below 30of the limit for
  3-6 months prior to applying for a home loan.
• New debt temporarily decreases a score.
• Make sure that the credit limit is being reported
  on the bureau report.
• Important to use cards every 2-3 months to keep
  active. Inactive accounts not considered in
  credit score.

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What Factors Determine a Credit Score?

• 2. 30 Amount Owed (continued)
• Better to spread outstanding debt among different
  cards rather than just one. Do not consolidate
  debt.
• Do not close credit cards except in certain
  circumstances.
• Going over the limit on a credit card even by 1,
  will cause a serious penalty.
• Keep credit separate from spouse.
• One maxed, both maxed.
• One delinquent, both delinquent.

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What Factors Determine a Credit Score?

• 3. 15 Length of Credit History
• Length of time a credit line has been opened is
  important.
• The longer the credit history the better. It
  improves score.
• Opening new credit cards will decrease average
  length of credit history and will bring down
  score.
• Hold onto old cards, even if the rate is not
  good.
• New credit users can NO LONGER add themselves to
  another persons account as an authorized user to
  generate a score.
• Continue to use cards to keep active.
• Dont close accounts erases credit history and
  lowers score.

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What Factors Determine a Credit Score?

• 4. 10 Types of Credit Used
• Mixture is best (auto loan, mortgage, credit
  cards)
• 3 to 5 revolving credit cards with historty is
  optimal.
• A mortgage account raises the score.
• New credit temporarily decreases the score for a
  month until unrated status goes away.
• High interest cards like HFC may hurt score since
  this type of account is seen as a desperate move.

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What Factors Determine a Credit Score?

• 5. 10 New Credit Inquiries
• Mortgage inquiries receive special treatment and
  20 inquiries can be made in a 30 day period and
  will be treated as 1 inquiry.
• Inquiries affect the score for one year.
• Personal, promotional and account review
  inquiries are know as soft inquiries and dont
  count.
• Hard inquiries (credit card applications,
  auto/mortgage) can affect your score from 2 to 50
  points.
• Insurance inquiries dont count.
• Pre-approved card offers are NOT really
  pre-approved.

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Inquiries that do not hurt your score?

• Job related
• Insurance / utilities
• Account review
• Personal (www.annualcreditreport.com)
• Promotional (pre-approved offers in the mail).

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What type of data is NOT used to calculate my
Credit Score?

• Race
• Color
• National origin
• Religion
• Gender
• Marital status
• Age
• Medical History

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The Cost of Bad Credit

• Home Financing 30 year fixed with a 150,000
  loan amount.
• FICO Score APR Rate Monthly Payment Interest
  Paid
• 720-850 5.861 886 168,947
• 700-719 5.986 898 173,271
• 675-699 6.523 950 192,134
• 620-674 7.673 1,067 233,993
• 560-619 8.452 1,148 263,378
• 500-559 9.234 1,232 293,619
• Example If your FICO score ranges between
  500-559 you could benefit as follows by improving
  your credit profile
• If your score improves to 720-850, you could save
  an additional 124,672
• If your score improves to 700-719, you could save
  an additional 120,347
• If your score improves to 675-699, you could save
  an additional 101,485
• If your score improves to 620-674, you could save
  an additional 59,625
• If your score improves to 560-619, you could save
  an additional 30,241

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How long will items get reported on my file?

• Delinquencies (30-180 days). Can remain 7 years
  from the date of the initial missed payment.
• Collection Accounts Remain 7 years from the
  date of the initial missed payment that led to
  the collection (the original delinquency date).
• Charged-off Accounts Remain 7 years from the
  date of the initial missed payment that led to
  the charge-off (the original delinquency date),
  even if payments are later made on the
  charged-off account.

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How long will items get reported on my file?

• Closed Accounts Closed accounts are accounts
  that are no longer available for further use.
  Closed accounts may or may not have a zero
  balance. Closed accounts with delinquencies
  remain 7 years from the date they are reported
  closed, whether closed by the creditor or by the
  consumer, but the delinquency notation will be
  removed 7 years after the delinquency occurred
  when pertaining to late payments. Positive
  closed accounts remain 10 years from the closing
  date.
• Lost credit card If there are no delinquencies,
  credit cards that are reported lost will continue
  to be listed for 2 years from the date the card
  is reported lost. Delinquent payments that
  occurred before the card was lost are reported
  for 7 years..

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How long will items get reported on my file?

• Bankruptcy Chapters 7, 11, and 12 remain for 10
  years from the filing date. Chapter 13 remains 7
  years from the filing date. Accounts included in
  the bankruptcy will remain for 7 years from the
  date they were reported as included in the
  bankruptcy.
• Judgments Remain 7 years from the date the
  judgment is filed.

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How long will items get reported on my file?

• City, County, State and Federal Tax Liens
  Unpaid tax liens remain 15 years from the filing
  date. Paid tax liens remain 7 years from the
  paid date of the lien.
• Inquiries Most inquiries listed on your credit
  report will remain for 2 years. All inquiries
  must remain for a minimum of 1 year from the date
  the inquiry was made. Some inquiries, such as
  employment or pre-approved offers of credit, will
  show only on a personal credit report pulled by
  you.

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How can I find out my Credit Score?

• Visit www.myfico.com and order same credit score
  a mortgage company uses for approvals.
• Requests for ones own FICO score is considered a
  personal or soft inquiry and will NOT hurt the
  credit score.

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How can I get a free copy of my credit report?

• By law, all consumers are entitled to a free copy
  of their credit report from each of the 3 credit
  bureaus once a year.
• Visit www.annualcreditreport.com to get yours for
  FREE. This is for the credit report only and
  DOES NOT include the credit score.

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Credit Score Myths

• Myth 1
• Closing Credit Accounts will help your score.
• Truth Closing accounts can make your credit
  history look younger than it is which will lower
  your score.

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Credit Score Myths

• Myth 2
• You can boost your score by asking your credit
  card company to lower your limits
• Truth This actually narrows the gap between
  your credit you use and the balance you have
  available. This has a negative affect on your
  score.

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Credit Score Myths

• Myth 3
• You can hurt your score by checking your own
  credit report.
• Truth FICO scoring formula ignores any
  inquiries generated when you check your own
  report and score.

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Credit Score Myths

• Myth 4
• You dont have to use credit to get a good credit
  score.
• Truth Credit scoring formula is designed to
  judge how well you handle credit over time. If
  you have no credit, the formula wont have data
  to generate a score.

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Credit Score Myths

• Myth 5
• Bankruptcy hurts your score so much that it is
  impossible to get credit.
• Truth Bankruptcy does deal a devastating blow
  to your score. However, re-establishing credit
  in a responsible manner, your score will begin to
  recover.

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How to increase your Credit Score

• First, get a copy of your credit report from all
  three credit bureaus.
• Make sure that the data is accurate. Request that
  any incorrect data be corrected. Then follow up
  by getting another copy of the report to make
  sure that it has, indeed, been corrected.

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How to increase your Credit Score

• Carry around 3-5 credit cards and pay on time
• If you dont qualify for a regular credit card,
  apply for a secured card.
• NOTE Debit cards do not help you establish a
  credit history because they work like checks
  drawn against your checking account.

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How to increase your Credit Score

• Keep up your good payment record. Don't slack
  off. The longer you pay on time, the more points
  you get. Your payment history and current payment
  pattern are important.
• If you have derogatory public information
  (bankruptcy, foreclosure, collections, etc.) in
  your file, the more time that has passed, the
  better. Better yet, don't do anything that will
  result in that type of derogatory information in
  your file.

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How to increase your Credit Score

• Bring past due balances to current status
  whenever possible.
• Past due accounts do not include
• Judgments
• Collection Accounts
• Pay down current balances below 50 of available
  credit. Do NOT do this if you need this money
  for down payment and or closing costs.
• Increase credit limits. See if your credit
  provider will increase your available lines of
  credit. This can reduce your overall debt ratio.
  Only do this if the credit card company can do
  this without a hard credit inquiry.

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How to increase your Credit Score

• Keep separate credit card accounts for spouse.
• Pay off past dues, collections and charge-offs if
  they are less than 2 years old. Charges older
  than 2 years will have little to no impact on
  your credit score if they are paid. Before you
  pay, ask the creditor to permanently delete this
  record from your credit report.

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How can I contact the Three Credit Bureaus?

• Equifax Information Services, LLCPO Box
  740241Atlanta, GA 30374800-685-1111www.equifax.
  com
• Experian701 Experian Pkwy.PO Box 949Allen, TX
  75013888-397-3742www.experian.com
• TransUnion LLCConsumer Disclosure CenterPO Box
  1000Chester, PA 19022800-888-4213
  800-916-8800www.tuc.com

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Top 10 Dos Donts During the Loan Process

• Dont apply for new credit of any kind.
• Dont pay off collections or Charge Offs.
• Dont close credit card accounts.
• Dont max out or over charge on your credit card
  accounts.
• Dont consolidate your debt onto 1 or 2 credit
  cards.
• Dont do anything that will cause a red flag to
  be raised by the scoring system.
• Do join a credit watch program.
• Do stay current on existing accounts.
• Do continue to use your credit as normal.
• Do call your mortgage lender if you receive
  something in the mail from a creditor or
  collection agency.

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Credit Scoring Resources
Mlend Mortgage207-B South Church StreetP.O.
Box 1250Middletown, MD 21769Office Phone
301-371-3355Toll Free 800-451-6420Mike Full
ext. 207Niko Negas ext. 213Website
www.mlend.com