The concept of
credit started back in 1956 with two men named Bill Fair and
Earl Isaac. Fair, a mathematician, and Isaac, an engineer,
founded the Fair Isaac Company; otherwise, known to us today, as
the FICO score. This credit
system has standardized the way the financial industry extends
“credit”.
As a result, there are 3 national credit programs at 3 different bureaus:
Beacon and Empirica, both
subscribe to the Fair Isaac’s FICO model of scoring and then they integrate their own
version of a person’s FICO
score. On the other hand, when borrowers are looking for a
mortgage loan, lenders pull what’s called a “tri-merge”. A
tri-merge merges and verifies all information detailed from all
3 unions into one report.
The main
determinants of a credit grade are based on your credit and debt
ratio.
Beacon scores range from
400 - 844; while,
FICO scores
range between 350 – 880. Conversely, lenders determine the
investment quality of a loan, with the equivalent of a grade, A,
B, C or D. y ‘A” paper represents the highest quality loan, and
D paper is the highest risk loan for the investor.
For example, if
your credit score is 680 or more, you fall in the ‘A’ paper
category; however, not all lenders rate credit the same way. So
the question is : how does your credit affect the interest rate
a lender will charge you? The answer depends on the level of the
consistency of good payment in your credit history, along with
your debt ratio. If both are great, the loan is assigned an 'A’
grade; and, qualifies for the best interest rate. If even one of
the factors is not up to par, the quality of the loan is
downgraded to 'A-" or 'B' paper. Consequently, the interest rate
goes up as the perceived risk factor increases. There is a
higher risk for a lender making a B, C or D paper loan because
there is a higher risk for a defaulted loan. Therefore, the
lender is compensated for the higher risk by charging the
borrower a higher interest rate.
When lenders
review one’s
credit score, it's
reviewed by an underwriter. The underwriter and
credit scores are assessed and
rated by the following criteria:
Lifestyle History
-
How long you’ve lived at your residence
-
Do you own or rent (Owning property – earns extra credit)
-
How long you’ve been employed at your current job
-
Education level (College Education – earns extra credit)
-
How much money earned and how credit has been used
Payment history
-
Public record and collection items
-
Severity, recent and frequency of delinquencies noted in
trade line section
Outstanding
debt
-
Credit history
-
Number of balances recently reported
-
Average balance across all trade lines
-
Relationship between total balances and total credit
limits on revolving trade lines
Pursuit of
new credit
Types of
credit in use
-
Number of trade lines reported for each type
-
Bankcard
-
Department store cards
-
Personal finance company references
-
Travel and entertainment cards
-
Installment loans
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Quick 'Improve Your
Credit Score'
Tips
-
Obtain a
Free Credit
FICO Score
-
Make any credit corrections with the proper
documentation
-
Pay off small balances on high limit credit cards
-
Consolidate credit card bills onto fewer credit cards
-
Cancel certain credit cards and shift the balances onto
fewer cards. (Shifting small balances to fewer cards raises
the ratio of your unpaid balances)
|
The bottom-line
is you will boost your buying power with a better
credit score.
Home Loans
