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Credit Scores - What are the types and why do they vary?

Posted on: 08th Apr, 2004 11:30 pm
A credit score is a 3 digit number that tells a creditor how creditworthy you are and how likely it is that you'll repay the credit once it is extended to you. These scores affect the interest rates you receive on mortgages, auto loans, credit cards, etc. In addition, when you go for an insurance policy or apply for a job, the insurer or employer may look at your credit scores. Even when you're looking to rent, your landlord would prefer it if you have a good credit/FICO score.

What is FICO score?

A FICO score is calculated on the basis of the FICO Scoring Model developed by the Fair Isaac Corporation. In most cases, when people talk about their credit scores, their FICO credit score is what they mean. Consumers can access different versions of the FICO score at the 2 bureaus - Equifax and TransUnion. These scores are known as the Beacon score and Empirica score.

Consumer FICO scores calculated by Experian are sold to lenders only and consumers can't access them. However, consumers can find their credit scores (based on Experian data) online at Experian. They can even request a free credit report from Experian, just like from other bureaus.

What is a good credit score?

Usually FICO credit scores range from 300 to 850. The higher your score is, the lower the risk to the creditor is when offering you a loan. A FICO score equal to or above 700 is considered a good credit score which will qualify you for some of the best deals at affordable rates.

What is a credit score chart?

A score chart helps you get an idea of credit score ratings based on the credit scores you have. The credit score chart is given below:
  • 730+ - Excellent
  • 700 - 729 - Good
  • 670 - 699 - Needs a closer look
  • 585 - 699 - Higher risk
  • Below 585 - Limited credit history

Can you get a free credit score?

Under the Fair Credit Reporting Act (FCRA), anyone is entitled to a free copy of their credit report once a year from each of the bureaus; but free credit scores are not available. You'll have to place an order with the bureaus and pay a fee (set by the Federal Trade Commission) if you'd like to get your credit score. You may apply for your credit scores online at www.annualcreditreport.com or contact them at their toll free number 877-322-8228.

What is the Credit Scoring system?

It's a system where the credit bureaus figure out your scores based on the information that is available from your credit report. The bureaus use a statistical program to compare the loan repayment history of consumers with similar profiles. Then they award points for each item that helps find the consumers who can easily pay down a debt. The total number of points adds up to your credit score.

Why do credit scores or FICO scores vary?

The major credit bureaus - Equifax, and Trans Union follow the FICO scoring model (developed by Fair Issac Corporation) to calculate a FICO score. But scores differ because they use minor variations in the FICO Scoring Model as well as assign different points to each item on your credit report.

Not all lenders/creditors and collection agencies will report your credit information to the same credit bureau. Therefore, the credit score you get from one bureau may differ from what you receive from another. In addition, your credit scores changes from time to time based on your credit transactions. So, make sure that your creditors update the bureaus with your latest credit details.

Do credit score ratings differ?

Credit ratings may vary from one lender/creditor to another depending upon the items (such as late payments on revolving accounts, mortgages, credit card balances,) they consider after reviewing your credit report. For instance, an auto loan provider may leave out an item that a mortgage lender would consider while providing credit score ratings.

Is Mortgage Credit score similar to the regular score?

Mortgage lenders consider the median score - the one that comes in between the maximum and minimum scores you receive from the bureaus. But often lenders may not use the median score in order to evaluate your creditworthiness because the credit report you pull from the bureau is based on the Consumer Model, where your lender may prefer to calculate the score using a different scoring system - the Mortgage Model.

The information used for both Models may be the same but the importance given to each tradeline account may vary. The Mortgage Model gives more emphasis to the tradelines that can affect your mortgage loan. Thus, your chances of getting a mortgage at a favorable interest rate may depend more upon your mortgage credit scores instead of your regular score.

Are there alternatives to FICO scores?

Apart from the FICO Scores, there are Alternative scores developed for consumers with poor credit. The Alternative scores are based on your payment history, outstanding loan balances, the type of credit accounts you have, and other factors.

As lenders pull your credit report from different bureaus, every lender will probably show different scores. Therefore, you won't get the same offers from different lenders. To avoid these discrepancies, the Vantage score has been introduced. A Vantage score ranges from 501 to 990 and is calculated the same way by each bureau thus giving you the same credit score, provided similar information is reported to each bureau

With the increase in the number of consumers who find themselves delinquent on their bills, lending standards have gotten tighter. Therefore, qualifying for a loan has become harder, especially if you don't have a good credit report or score. Especially when it comes to getting a mortgage, even those that are not supposed to be score driven require you to have a minimum 580 credit score. So, it's important to protect your credit standing and maintain a good score.

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Related Discussions
My Credit score with Trans Union is 672, experdian 634, equifax 623. Would I qualify for a morgage with these scores and would they take an average of these scores. I was looking at buying a home now, should I wait or just re finance when my score improves.
Posted on: 26th Apr, 2007 05:46 pm
Hi Darren,

Welcome to Mortgagefit discussion board.

Your scores are reasonably good and would be able to qualify for good rates with these scores. Lenders will make an average of the scores you have to see if you can qualify for a loan.

In addition to your score, lenders will also look at your income, job status, and debt to income ratio while considering your loan application. If other things are also good then you can shop with a few lenders to see what rates they are offering. And if the rates offered are good then you can go for the purchase.

But you can also wait for some more time and let your score improve further then rates will be the best one can avail. It also depends on the other factors I mentioned above. So you have to calculate and then decide what would be good for you.

Do let me know if you have any other questions.

Thanks
Blue
Posted on: 26th Apr, 2007 06:09 pm
"My Credit score with Trans Union is 672, experdian 634, equifax 623. Would I qualify for a morgage with these scores and would they take an average of these scores. I was looking at buying a home now, should I wait or just re finance when my score improves."

Darren, I would say your scores are what can help you get a good rate. If other points that Blue mentioned are favorable then start looking for the house. But what range you are looking to buy the house in? Need to calculate if with your income you will be able to qualify for a mortgage for that amount.

Miller
Posted on: 26th Apr, 2007 06:17 pm
Hi Darren,

It's not that the lenders would take an average of your credit score. They would consider the score provided by each of the credit reporting agencies and the middle score especially. The middle score is the one between the maximum and the minimum as provided by the agencies. In your case, it will be 634.

You may get better rates at this score but it is somewhat difficult. I feel you should wait for some more time before your score improves. And, in the meanwhile you may start taking steps to repair your credit on your own.

Good luck :)
Posted on: 27th Apr, 2007 12:50 am
Hi,
Its a great post.I found it is very interesting and more informative.But i want to know how can i contact the agency to get my report?
Posted on: 05th Oct, 2007 03:30 am
The three agencies use one website/ toll free number ad one mailing address where you can contact and order for a free report annually. To order, you may click www.annualcreditreport.com or call up 1-877-322-8228.
Posted on: 08th Oct, 2007 12:21 am
Hi,
Great explanations about Credit score and its importance.Awesome post!I can provide some tips for Raising Your Credit Score.Pay all your debts on time.

Keep your debt levels down. The less outstanding debt you have relative to your overall credit limits, the better.

Use your credit cards but pay down the balances. Don’t let them mount up. Many credit scores compare the amount of debt you have to your credit limits. The closer you are to your credit limit, the more likely that your credit score will be negatively affected.
Posted on: 26th Nov, 2007 11:34 pm
One thing to remember about credit scores is that in most cases it represents that you are good at borrowing money and paying interest. The only real good time to borrow money is when buying a home. If you have a steady job and have paid your bills on time and can save up to put 20% down on a home, in most cases you can get a good interest rate through manual underwriting. Paying cash for cars and other purchases is easy if you want to do it. Start with a 1000 to 2000 dollar car then save the money you would make payments with and move up in car 2 to 3 years. Keep saving the payment like a steady bill. You can do this with all other purchases. Think about it, if you can borrow and pay interest you can save and earn interest.
Posted on: 23rd Jan, 2008 08:12 pm
Hi Guest,

Welcome to the forum.

Excellent information and excellent suggestion too :)

Are you a lender? Why don't you join this community and help people with your knowledge and experience :) That will be really great.

You can introduce yourself and let us know about yourself at http://www.mortgagefit.com/introduce-yourself.html

Hope you will keep on helping people with such informative posts.

Best of luck,
Larry
Posted on: 24th Jan, 2008 02:46 pm
I have cleared most of my bad credit, resulting in my fico score increasing by 14 pts. The question I have is, "I still have about three charge off I am currently working on and a lien from the IRS. What are my chances of getting approve for a home loan.
Posted on: 02nd Mar, 2008 05:31 am
Hi guest,

It's good that you could increase the FICO score by some points. But I still feel you should wait for some more time, settle the charged-off debts, pay off the lien and then go for the home loan. By the way, what type of lien is it? any property tax lien or what? In short chances are feeble, not just because of your score but due to the fact that you have been through 3 charge-offs and an IRS lien thereby having negative marks on your credit report.

Regards,

Jessica
Posted on: 02nd Mar, 2008 11:21 pm
I have cleared most of my bad credit, resulting in my fico score increasing by 14 pts. The question I have is, "I still have about three charge off I am currently working on and a lien from the IRS. What are my chances of getting approve for a home loan.

Well, you are making progress. I would say that a loan officer would need much more information in order to help you decide if you can qualify for a home mortrgage loan.

I'd encourage you to investigate with your local bank -- walk in and ask! Take with you some information, such as income figures, W-2 tax forms, rental history (if any), employment history. This is relatively simple. Try to avoid paying money to make application -- it is not necessary. Also, take your credit report with you. LOOK INTO IT!! Good Luck!!

If you are not happy with the response you get, try a mortgage broker who has a wider range of products to offer. Still, first-time home buyers may do better at the bank. If income is a real problem, there are non-profit organizations available to assist with down-payment money.

Certain lenders, including FHA-insured, may allow the payment of the lien at closing, even out of seller's contribution. Good Luck!!
Posted on: 11th Mar, 2008 03:21 pm
Those are some really good scores and I am sure that you have worked hard to keep them that way. I would say that they are good enough to get a descent loan, and get a descent home for a good price in todays market. Make sure that you shop for a good deal, explore all options and try to get the best rate that is possible for you. Goodluck and good job on your scores, I am hoping mine will be that high some day. I have been working hard trying to get them up and plan to check them one year from now to see if I have any improvement. You set a good example, goodluck, hope you find what you are looking for.
Posted on: 11th Mar, 2008 05:40 pm
If you have collections on your record and pay them off ,how long will it take for your credit score to go up?
Posted on: 18th Mar, 2008 11:29 am
Hi Patricia,

You need to settle the debt after which the FICO score will increase by 40-100 points depending upon the number of collections. For this, you'll have to send the collection agency a letter offering to settle the debt for a certain amount.

To keep your score up to the level, see that you have good payment history for 2 years after the settlement. Also the debt to available credit on your credit cards should be below 30%.

If you've paid off the collection accounts, then simply dispute them off your report.

Thanks.
Posted on: 19th Mar, 2008 03:06 am
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