Credit Reports and Credit Reporting Agencies:

When you are interested in making a large purchase or applying for credit, you will encounter the ‘credit application'. You fill out that application and the company from which you want credit (let's say a United Airlines Visa card) will pay a credit reporting agency to report your credit history and credit score so the company can asses the risk of granting you credit.
Prior to the 1980's it took an intelligent human being on the other end of that credit application to asses if you were credit worthy.

Today the process is automated and the credit reporting agency(s) give you a score based on a number of factors. The use of credit scoring is ubiquitous…it's everywhere and you are subject to it whether you are aware of it or not. If you apply for credit you get scored. This score is euphemistically called the FICO score. Whether you are approved for the credit you desire and what interest rate you ultimately get from the credit grantor (Visa for example) is determined by how high your credit score is. The FICO score replaces to a large extent the intelligent human being on the other end of the credit process. Credit card companies, Mortgage lenders, Auto dealers, Department stores and Landlords can now quickly and effortlessly approve or decline your credit application. No one, but the folks who created the scoring programs, knows exactly how they work and what EXACTLY determines your score and the weighting factors involved. That being said, there is a lot we know about what is most important to your credit score and how to have the most impact on improving your score.

Something about the FICO score should be said up front…to make it clear and keep in perspective what it is intended to accomplish: The FICO score is intended as a predictor of the likelihood that a borrower will get a 90 day late on any trade line in the next 24 months. That's it… The higher your score (for a mortgage the top score is 850) the less likely you are going to be 90 days late on ANY of your credit accounts. A Little more History…Credit bureaus were looking for a way to classify borrowers into risk groups. Fair Isaac Corporation was approached to help devise an automated way to accomplish this. Ultimately, 10 base groups were devised from the existing data on borrowers. Eight of the base groups were used to classify ‘good' borrowers. Two of the base groups were used to classify ‘bad' borrowers. One is used for people with 90 day lates. One is used for people with bankruptcies. Who are the credit reporting agencies? There are three credit reporting companies. Experian, Transunion, and Equifax dominate the market place. These are the three FICO, credit, scores that are reported to you when your credit report is run. And there can be a fair amount of variance between the ‘FICO' score that Experian, Transunion and Equifax report. Why is this? Each of these companies uses different scoring programs and can have different data: Experian uses Fair Isaac, Equifax uses Beacon, and Transunion uses FICO classic. And clearly from the reports I see, each of the programs weights factors slightly differently from each of the other programs. Usually, the scores are within a 25 to 50 point range from one another and a lender, tending to be a bit conservative on this, will use the lower middle score of a married couple. This means that generally they end up using the second lowest score of the six reported to them for this married couple. Next time we will begin discussing the elements that determine your score, the weighting of the elements in your score and the factors within each of those elements.

Don Brown www.kathdonloans.com

Donald Brown is a Mortgage Loan officer and advises clients on managing their credit as well as brokering home loans. You can visit him at his Web site:

www.kathdonloans.com