• understand the world of credit;
• understand how lenders determine the interest rates and credit limits they offer you;
• understand how to improve your credit score.

The Credit Score & Analysis allows you to view your credit standing through the eyes of a lender.

Credit scores are being used for everything these days, including mortgages, credit cards, insurance, and even employment decisions. Your credit score can be the number one thing that causes a credit company to say "yes" or "no" to your credit application. Along with the credit report, lenders also buy a credit score based on the information in your credit report. While a credit report can be considered your detailed financial history, a credit score is an objective summary of that information. A credit score measures the likelihood you'll repay what you owe, and it is based on information in your credit report. In other words, it represents your creditworthiness as a number. Keep in mind that when lenders consider a loan or credit application, they generally ask for more information because credit scores are not the only factor they use in making decisions. Many additional factors including applicant's income vs. the size of the loan will be used in determining risk.

With easy access to FICO scores on the internet, consumers get a new level of awareness of credit issues and improved management of household credit.

A credit score is a snapshot of your credit risk at a particular point in time. It is designed to give lenders a fast way to accurately predict the risk involved if they give you a loan. The credit score is quicker and less subjective than reviewing the actual credit report information. It's the credit score that makes it possible to get instant credit at places like department stores and online credit card application sites. If you've ever received "instant" credit at such places, you've benefited from credit scores.

It is generated through statistical models using elements from your credit report. The higher your credit score the more likely you are to be approved for loans and receive favorable rates. Your credit score is a fluid number, and it changes as the elements in your credit report change. For example, payment updates or a new account could cause your score to fluctuate.

Credit scores are an advantage for consumers because they:

• Are objective and precise
  
• Result in faster, more accurate credit decisions
  
• Reduce your cost of credit by letting lenders make the best, most efficient decisions

Three Major Credit Bureaus' Credit Score

Equifax Credit Score	Experian Credit Score	Trans Union Credit Score

Know What Lenders see about you

Credit Score

Until recently, your credit score was not available to you. Only lenders and other businesses who used the score could access it. In 2001, however, all of this changed due to pressure from the U.S. Congress, industry, and consumer groups. Now you can get your credit score online instantly on your computer screen.

Credit scoring is a scientific method that uses statistical models to assess an individual's credit worthiness based on their credit history and current credit accounts. Creditors--especially those in the mortgage industry--frequently use the scores when deciding who receives loans because it is a fast, objective way to evaluate a credit report. Each creditor decides what credit score range it considers to be a good risk or a poor risk.

FICO Score

There are literally thousands of score models used in the credit industry which consider different variables for different types of credit. Credit bureaus offer several different types of scores in their product portfolio, appealing to the vast array of creditors and credit applications in the country.

In the 1980s, Fair, Isaac and Company devised a mathematical model to predict the credit risk of consumers based on the data collected from an individual's credit report. Today, the Fair, Isaac (or FICO®) system is the scoring model most widely used by lenders. Fair Isaac is an independent company that came up with the scoring method and software used by banks and lenders, insurers and other businesses.

The score ranges from 300 to 850, with a higher score indicating a lower credit risk. For a score to be calculated, your credit report must contain at least one account that has been open for six months ore more, and at least one account that has been updated in the past six months.

To get the best rate on a mortgage consumers generally need a score of 720 or above. When it comes to credit cards, anything over 700 will let you get best low interest offers.

How Credit Scores Are Used

Most lenders that issue credit or loans such as banks, credit card companies, auto dealers and retail stores use credit scores to quickly summarize a consumer's credit history, saving the need to manually review an applicant's credit report and provide a better, faster risk decision.

Your credit score doesn't just affect whether or not you get a loan; it also affects how much that loan is going to cost you. As your credit score increases, your credit risk decreases. This means your interest rate decreases.

Lenders use the FICO score as a component in how they set the interest rate they will charge for a loan.

This chart shows an example of how interest rates for a mortgage loan can vary based on your credit score:

The difference in these rates illustrates how your FICO score helps determine what you will pay for your loan. The actual interest rate for which you qualify may depend on several other important factors in addition to a credit score, such as your income, down payment, debt-to-income ratios, additional credit related evaluations and other lender-specific criteria.

Learn how responsible credit management can result in interest rate savings over time.

Different types of credit scores

There are many different credit scores in use, but the most widely used score in the financial service industry is the FICO score generated by the Fair, Issac Company. Each credit bureau can also generate its own credit score. The three national credit bureaus each have their own version of the FICO score with their own names. Equifax has the Beacon system, TransUnion has the Empirica system, and Experian has the Experian/Fair Isaac system. The bureau-based credit scores draw on statistics from a large number of consumers across a variety of accounts. Custom scores are generated by individual lenders, who rely on credit bureaus and other information, such as account history, from their own portfolios.

Scores are not just used to rate the credit worthiness of consumers. Lenders also use scores to predict consumer response to offers sent in the mail, the likelihood that account holders will file for bankruptcy or that a consumer will move their account to another lender.

The scores are correlated so a 700 at one bureau is the same as a 700 at another," but because the bureaus might have different information on you, it is not unusual for credit scores to differ by even 50 or more points from one credit bureau to another.

How FICO scores are calculated

A FICO score is based on five key factors:

• Your payment history (which accounts for the biggest chunk -- about 35% -- of your score);
• 
  How much you owe on all your accounts compared with your available credit (about 30% of your score);
• 
  The length of your credit history (about 15%);
• 
  How much new credit you've been seeking (about 15%);
• 
  The types of credit you use -- is it a healthy mix? (about 10%).
  

Credit Score Analysis

A personalized credit score analysis tells you what you're doing right and what you're doing wrong. The analysis reveals what your credit score means to you and to lenders. With customized tips for improvement, the credit score analysis is a powerful credit management aid.

Credit score analysis tells you how the lender is likely to evaluate your history. With the personalized guidance available through the credit score analysis service, you will know precisely how to raise your scores -- whether through paying off balances on certain credit cards or even expanding their use of credit.

You will be able to proactively manage their credit.

Why you should check your credit score

Paying attention to your credit score can pay off -- a higher score can snag you a lower interest rate or qualify you for smaller down payment.

Lenders use your score to help determine what terms to offer you when applying for a loan. With this knowledge, you can be better prepared when shopping for a loan.

Know what type of interest rates you should expect to receive

How to improve your credit score

In general, the following behaviors are likely to improve your credit score:

• Consistently paying your bills on time
  
• Keeping your overall debt at a reasonable level relative to your income
  
• Actively and responsibly using several credit cards
  

* Rates are based on the national average 30-year fixed-rate $150,000 mortgage.

What is Credit Scoring?

You may wonder how a creditor can look at all the information on your credit report and make a fair decision about your credit. Along with the credit report, lenders can also buy a credit score based on the information in the report. Credit scoring is a scientific method that uses statistical models to assess an individual's credit worthiness based on their credit history and current credit accounts. Credit scoring was first developed in the 1950s, but has come into increasing use in the last two decades.

A computer-generated score is compiled using information from an individual's credit report. Creditors-especially those in the mortgage industry-frequently use the scores when deciding who receives loans.

Why is credit scoring used?

By using credit scoring, a lender can quickly and objectively evaluate your credit history in a consistent manner, and determine the likelihood that you will repay the loan as agreed. The use of credit scores not only improves the accuracy of the analysis of your credit history, but does so in a way that enhances the efficiency and consistency of the underwriting process.

Credit scoring also protects you. This is because your age, health, race, religion, gender, national origin, marital status, income, and employment are not considered in determining your credit score.

Advantages of Credit Scoring

The widespread use of credit scoring allows for speedy, objective analysis of credit histories.

Credit scoring has allowed companies to offer "instant credit," which was unheard of in years past. As you browse through aisles of washing machines or peek into the windows of new cars, a prospective lender can order your score and, if they like what they see, give you loan or credit approval on the spot.

It also means that borrowers are less likely to experience problems with individual lenders' prejudices since it does not take into consideration race, gender, religion, national origin, marital status and whether or not the applicant is receiving public assistance.

Because credit scoring is objective and based on large volumes of verified statistical data, credit scoring brings a new level of fairness to the credit-granting process.

How is a credit scoring model developed?

To develop a model, a creditor selects a random sample of its customers, or a sample of similar customers if their sample is not large enough, and analyzes it statistically to identify characteristics that relate to creditworthiness. Then, each of these factors is assigned a weight based on how strong a predictor it is of who would be a good credit risk. Each creditor may use its own credit scoring model, different scoring models for different types of credit, or a generic model developed by a credit scoring company.

Key Points

• Your credit score is determined by a combination of many factors. No one piece of information or factor will determine your score.
  
  
• Credit scoring systems assign points to factors that help predict who is most likely to repay a debt. Your credit score helps predict how likely it is that you will repay a loan and make the payments when due.
  
  
• Your score only looks at information in your credit report. Lenders, however, look at many things when making a credit decision, including your income and the kind of credit you are applying for.
  
  
• The most commonly used scoring systems give you a number from the mid-300s to the mid-800's, with high scores being better. Scores vary depending on the type of credit you are seeking. For example, recent auto loan history is weighed more heavily when applying for a car loan.

For more information on how credit scores are calculated, see the following pages:

FICO® Credit Score

FICO scores were developed by Fair Isaac & Company, Inc. for each of the credit repositories. The scores are: (Equifax) Beacon, (Experian, formerly TRW) Experian/FICO and (TransUnion) Empirica. They are simply repository scores meaning they only consider the information contained in a person's credit file; they do not consider a persons income, savings or amount of a down payment for a mortgage.

Your score may be different at each of the three main credit reporting agencies. The FICO score from each credit reporting agency considers only the data in your credit report at that agency. If your current scores from the three credit reporting agencies are different, it's probably because the information those agencies have on you differs.

But no score says whether a specific individual will be a "good" or "bad" customer. While many lenders use FICO scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no single "cutoff score" used by all lenders.

A FICO score is based on the information in your credit report located at that particular credit bureau. The actual scoring process is proprietary, and the algorithms are copyrighted. A score is determined by summarizing a number of factors in your credit report.

Your FICO Score is calculated by following the rules below:

• Previous credit performance (35%) : How's Your Payment History?

  Information about the way you paid your credit accounts in the past, including late payments and bankruptcies.
  
  FICO considers whether you have accounts in collection; whether you have any delinquencies, and how frequent and recent they are; and whether you make your payments on time. How much impact each item has on your score depends on what other information is in the report. For instance, one late payment may not affect your score significantly if the rest of your history is good, because the model looks at credit patterns, not isolated credit mistakes. In addition, FICO gives you points for maintaining a good payment relationship.

• Current level of indebtedness (30%): What is the Amount of Outstanding Debt?

  The amount of credit you are using, and the amount of credit still available.
  
  FICO considers the number of balances recently reported, the average balance across all trade lines, and the relationship between the total balance and total credit limit. FICO considers your current level of borrowing and whether you are close to or over your limit. Carrying too much credit is held against you even if you do not have balances on those cards.

  
  

• Time credit has been in use (15%): How established is Your Credit History?

  The number of months your credit accounts have been on your credit report.
  
  FICO looks at how long you have had your account, the total number of inquiries and new accounts opened, the number of inquiries and new accounts opened in the last year, and the amount of time since the most recent inquiry. Banks, department stores, employers or landlords make "inquiries" on your credit report every time you apply for credit or a loan at that institution. The FICO scoring model considers inquiries because statistics show that those anticipating financial troubles try to increase the number of credit lines they have available. The FICO model has taken into account certain lender practices that normally would negatively affect your credit report. For instance, if you were interested in buying a car and the dealer agreed to finance you, the dealer may run credit inquiries on
  various lenders, which would then show up as numerous inquiries on your credit report.

  Beginning the first quarter of 1998, FICO models treat all inquiries occurring within a 14-day period as one inquiry. In addition, all models will ignore all auto-and mortgage-related inquires that occur within a 30-day period before calculating your score.
  

   

• Types of in use (10%): Is it a "healthy" mix?
  

  What Types of Credit Do You Use?
  FICO looks at the diversity of credit you use, whether you use bankcard, travel and entertainment cards, department store cards, personal finance company references, and/or installment loans.

• Pursuit of new credit (10%): Are you taking on more debt?
  

  Inquiries - The number of times you have applied for credit in the recent past.

Negative Information:

Negative information in your credit report that could impact the FICO score includes bankruptcies, delinquencies or late payments on accounts, collections,
too many credit lines with maximum available funds borrowed, too little credit history (less than five credit lines in the past two years), and too many credit report inquiries.

Information FICO Does Not Consider:

FICO does not consider your race, color, religion, national origin, sex, sexual orientation, marital status or age.

The Reason Codes

When a lender receives your credit score, it includes "score reason codes" to explain the top reasons your score was not higher. These codes can give you an idea of how you should start improving your score, such as closing unused credit accounts or being more diligent about making payments on time.

Lenders are not required to tell you your credit score, but if your score is low and you are turned down for a loan, the lender must give you the reasons for your low score. Your score is accompanied by a maximum of four "Reason Codes" that explain why your score wasn't higher, listed in order of impact on the score. These codes are essential in helping you improve your score later in time.

FICO reason codes show how many aspects of your credit report are used in a FICO score. Your four reason codes would be from this list:

• Amount owed on accounts is too high;
  
• Delinquency on accounts;
  
• Too few bank revolving accounts;
  
• Too many bank or national revolving accounts;
  
• Too many accounts with balances;
  
• Consumer finance accounts;
  
• Account payment history is too new to rate;
  
• Too many inquiries in last 12 months;
  
• Too many accounts opened in last 12 months;
  
• Proportion of balances to credit limits is too high;
  
• Amount owed on revolving accounts is too high;
  
• Length of revolving credit history is too short;
  
• Time since delinquent is too recent or unknown;
  
• Length of credit history is too short;
  
• Lack of recent bank revolving account information;
  
• No recent non-mortgage balance information;
  
• Number of accounts with delinquency;
  
• Too few accounts currently paid as agreed;
  
• Time since derogatory public record or collection;
  
• Amount past due on accounts;
  
• Serious delinquency, derogatory public record or collection;
  
• Too many bank or national revolving accounts with balances;
  
• No recent revolving balances;
  
• Proportion of loan balances to loan amounts is too high;
  
• Lack of recent installment loan information;
  
• Date of last inquiry too recent;
  
• Time since last account opening is too short;
  
• Number of revolving accounts;
  
• Number of bank revolving or revolving accounts;
  
• Number of established accounts;
  
• No recent bankcard balances;
  
• Too few accounts with recent payment information.

What Is a GOOD Credit Score?

What actual number is a good score depends on the scoring model, the type of loan, and the lender's acceptable risk level and credit policies. For some models like FICO, the higher the score, the better. For other models, the lower the score, the better. If the score on a borrower's credit report is too low for one
product, it may be acceptable for other products. Likewise, if one lender turns down a request for credit, it does not mean that another one will. For instance, an automobile dealer may accept a lower score than a creditor who offers an unsecured line of credit.

Although each lender has different standard, the following is a general guideline based on your FICO score.

Many lenders reserve their most favorable quotes of rates and fees for applicants in the upper FICO score ranges -- 700 and above. Mortgage applicants in the low 600s and below get progressively higher rate quotes and are charged higher loan fees. FICO scores, in other words, often determine what you pay for the money you borrow.

If you're interested in current average interest rates, visit myFICO.com.

Why Should you get your credit score?

When you order your own personal credit report, you can see the same credit history a lender sees, but a score can tell you more. It tells you how the lender is likely to evaluate your history.

If you want to get an idea of your total credit picture, having your credit score as well as your credit report can help you in several ways:

• Know where you stand before applying for credit
  Prevent surprises when applying for credit by knowing where you stand
  
  
• Understand your total credit picture
  This is important because lenders often review both your credit report and a credit score when considering an application.

Check Your FICO Score

For years now, customers have been barred from ever seeing their FICO
scores and the method whereby their FICO scores were obtained. But after many years of pressure by consumers and legislators, now you will not only be able to obtain your FICO score from your loan officer, but you will also be able to go on-line and find out the specific factors that are affecting your score. 

Reminder

Remember that the lender, not a credit score, makes the final decision to approve a mortgage loan application. A credit score is simply a tool used by the lender. The lender may take into consideration any special reasons for your past credit problems. In addition, the lender will look at more than just your credit score such as your equity investment in the home, job history, income, savings, and the type of mortgage loan you want -- before making a final decision.

What Makes Up a FICO Credit Score?

Source:Myfico.com

Under this formula, if your FICO® score is 680, it would break down like this:

238 points for your payment history (35%)

204 points for your outstanding balances (30%)

102 points for your credit history (15%)

68 points for your new credit applications (10%)

68 points for the types of accounts you have (10%)