Your Credit Rating

Bill Fair and Earl Isaac created decision making solutions to a wide range of industries; one being Credit Reporting. Thus we have the company name FAIR ISAAC Co. or "FICO". The company claims it pioneered credit scoring although it took over 35 years before the credit industry began to use scoring. Because lenders and credit reporting agencies were involved in a growing number of lawsuits alleging bias and discrimination in their credit granting process; credit scoring was thought to provide an unbiased framework for decision making related to credit "risk".

Although income and assets play a major role in approving a mortgage loan, your credit history is critical in the outcome of this process and the interest rate at which credit is granted. You need to know your "Credit Rating" and the affect it will have on the terms of your credit.

How the FICO Rating System Calculates Your Credit Score

The FICO Scoring Model is proprietary and not published but we do know that the model contains 33 variables that were found in combination to be predictive of an individual's future ability to repay a loan. These variables are grouped into 5 categories:

Payment History - accounts for approximately 35% of your score.

Amounts Owed - the current balance-to-limit ratio accounts for approximately 30% of your score.

Length of Credit History - accounts for approximately 15% of your score.

New Credit - accounts for approximately 10% of your score.

Types of Credit in Use - accounts for approximately 10% of your score.

Inquiries - Excessive inquiries within a 90-day period can lower scores drastically.

What FICO Scoring Ignores

• FICO Scoring ignores your race, color, religion, national origin, sex, and marital status.
• Your age
• Your salary, occupation, or employment history
• Where you live

Certain types of credit inquiries (requests for your credit report):

The score does not count consumer disclosure inquiries (requests that you've made for
your credit report to check it).

It does not count promotional inquiries (requests by lenders in order to make you a pre-
approved credit offer) or administrative inquiries made by lenders to review your account
with them.

How to Interpret Your Credit Report and Scores

Since credit scoring is here to stay, it's important for you to know the information contained in your credit report and how it affects you when applying for a mortgage.

When applying for a mortgage, there are three credit scores for each borrower on the loan application. The lender obtains FICO Scores on each individual from three major credit bureaus, Equifax, Trans Union, and Experian. Each bureau has your credit score and all label it with a different name, Beacon, Empirica, or Fair Isaac. Although the score names are different, they each use the FICO Scoring model. You will notice that the three scores are different between bureaus. Creditors do not report to each bureau and items of public record such as bankruptcies and judgments are not picked up by each bureau. As a practical matter, the lender normally uses the middle score in it's evaluation of your risk profile (probability you will repay the loan). What is the minimum and maximum score? As an example, Experian's scores range from 350 to 900. Can an individual receive a zero or no score? Yes, occasionally a credit report is issued with no score when there is insufficient data to review.

Accompanying every credit score are four "reason codes". These codes identify some of the 33 variables that had the most influence in lowering your credit scores. Examples of the 10 most common reason codes are:


1) Serious delinquency
2) Serious delinquency and public record or collection filed
3) Derogatory public record or collection filed
4) Time since delinquency is too recent or unknown
5) Level of delinquency on accounts
6) Number of accounts with delinquencies
7) Amount owed on accounts
8) Proportion of balances to credit limits on revolving accounts too high
9) Length of time accounts have been established
10) Too many accounts with balances

How Long Does Your Credit History Remain on Your Report?

The length of time information remains on your credit file is shown below:
Credit Accounts -
Accounts paid as agreed remain for up to 10 years*
Accounts not paid as agreed remain for 7 years*
Collection Accounts remain for 7 years*
* These time periods are measured from the field on your credit report titled "Date of Last  Activity" for each credit account. (The question remains as to what constitutes the the last activity date on the account.)
Courthouse Records (Public Records section of your report)
Bankruptcy - Chapter 7 & 11 remain for 10 years from the date filed.
Bankruptcy - Chapter 13 non-dismissed or non-discharged remains 10 years from date filed.
Unpaid Tax Liens remain indefinitely.
Paid Tax Liens remain for up to 7 years from date released.
Paid or Unpaid Judgments remain on file for 7 years from date filed.
(New York State Residents Only: Satisfied judgments remain 5 years from the date filed, paid collections remain 5 years from date of last activity. California State Residents Only: All tax liens remain 7 years from date filed.)