Sunday, May 13, 2007

Anatomy Of A Credit Score

Corey Wilson, with Princeton Capital, passes along this valuable information.

Contact Corey at:
Tel. (925)253-6326

Credit scores today are generated by a complex series of algorithms designed to assess the risk that a borrower will have a late payment within 24 months.
Though every borrower is assessed by the same parameters to generate a credit score, these parameters are weighted differently depending on the borrowers’ characteristics and how well the borrower fits one of ten profi les. Specific profiles are reserved for individuals with even just one 90-day late payment or bankruptcy in their credit history.
More mortgage lenders tie their rates directly to credit scores.

Components Of The Score
Though the model evaluates each data element with respect to “Recent-cy”, “Frequency” and “Severity”, the most important of these perspectives is recent-cy.
35% - Payment History
The perspective weighted most heavily in assessing
payment history is recent-cy.
  • Age of last late payment less than 7 months - big hits
  • Age of last late payment less than 7-24 months - less hit
  • Age of last late payment less than 24months -significant relief

  • 30% - Balances
    This portion of the score assesses how wisely an individual utilizes thier credit. Ideally a borrower should have between 3-5 credit lines. If the ratio of cumulative available revolving credit to cumulative curent balance is high, the credit score will take a hit.

    • Ratio less than 50% - no hit
    • Ratio more than 50% but less than 75% - less hit
    • Ratio more than 75% = big hit

    15% - Credit History

    This portion of the score assesses the number of new trade lines and their respective ages. If trade lines need to be closed, careful consideration
    must be made to the effects of trade line age per creidt amount extended.
    The most credit-scoring-wise decision would be based on the reason codes in the individual reprot making specifi c accomodation for individual circumstances.
    10% - Type of Credit
    This portion of the score reflects what the scoring engine determines a
    “good” mix of credit types. What is “good” in one profile type may not
    be as good if assessed according to another profile type. Across all pro-
    fies, however, finance company credit lines are negatively assessed.
    10% - Inquiries
    Because the engine assumes that a person applying for multiple trade
    lines within a short period of time may be indicative of financial trouble,
    this portion of the scoring engine examines the number of inquiries over
    time made to an individual’s credit report. The scoring engine treats certain economic sectors differently than credit line issue-ers. If an inquiry is made by a lender within the last 12 months, the mortgage financier gets a 30 day window during which time additional inquiries will not negatively affect the score.