Credit Scores

A 3 in 1 credit score, also known as a tri-merge or merged credit report, is most often used in the mortgage lending industry. There are now only three national credit bureaus, Experian, Trans Union, and Equifax. Most lenders report the same information to all three companies. But the sheer volume of information, software differences, and, sometimes, “timing” issues result in score variations from bureau to bureau. Using somewhat different credit scoring formulae also contributes to a variety of credit score ranges for the same person.

To eliminate or at least minimize the differences, particularly in the case of mortgage loans, a 3 in 1 credit score is used. Instead of requesting a home loan credit score from one bureau or even three separate reports, mortgage lenders normally order a merged report, which combines all the information from the three bureaus. The report also shows credit score information from each bureau. This credit score for mortgage purposes covers all the bases and includes the entire information available to the credit score companies.

To arrive at the credit score needed for mortgage approvals, lenders normally use the “middle” score reported in a merged credit report. For example, here are numbers you might find in a 3 in 1 credit score:

• Experian 685
• Trans Union 672
• Equifax 663

People often want to know the difference between a bad credit score and good credit scores. While a natural and reasonable question, the answer is much more complex. A high credit score is easy to differentiate from a low credit score. But the difference between an excellent score and a poor credit score, like art and beauty, tends to be in the “eye of the beholder.”

If you apply for a credit card, an auto loan, and a home mortgage on the same day, the lenders will evaluate your credit score ratings differently. The credit card lender will normally rate your credit score info as a “pass/fail” decision. If your credit score numbers are equal to or above their “break even” point, you will be approved for the card. However, should your credit rating scores fall below this level, you will be rejected.

Your application for an auto loan will be analyzed, using credit score agencies reports, as pass, fail, and, as long as you are above the minimum credit score, approved with terms (interest rate, down payment, and loan term) appropriate for your personal credit score, whether good or bad.

Meanwhile, your credit score and mortgage terms are closely related. While a lower credit score will not prohibit you from getting financing, your credit score and mortgage rates are closely matched. The closer you are to the maximum credit score the closer you get to receive the lowest interest rate available.

As you can see, the definition of a bad credit report depends, not just on your credit score ranking, but on the type of financing you want and the guidelines of individual lenders for the type of loan you request.

There is much debate about whether to use an outside company to help fix your credit score. The primary question to consider: Why do you need to “fix” your credit score? There are some good reasons that arise:

• Your credit score after bankruptcy, for some reason, hasn’t increased;
• You find out your credit score is much lower than you believe it should be;
• You get your credit score and notice inaccurate information in the report;
• You have recently had an inability to make payments on time and you now have a low credit score.

Another source of confusion is that many of these companies are “non-profit” corporations, which makes them appear to be philanthropic or government-related entities. In almost all cases, they are neither. Even if they charge you no fee, they are charging many lenders to associate with them. This arrangement then brings up the question: How objective can these companies be if their income comes from lenders?

If the problems are a post-bankruptcy problem, a score lower than it should be, in your opinion, or you notice apparent inaccurate information on your credit report, you can usually correct these situations yourself. For instance, if you’ve recently been discharged in bankruptcy, your credit score should increase because the formerly derogatory information should be removed from your credit score. Unfortunately, at times, it takes longer than it should to remove this information. In other cases, a number of accounts included in the bankruptcy are not removed from your file. A lower than reasonable credit score and inaccurate information in your file often tend to occur together and give you a good reason to dispute credit score data.

All you need do is write to the bureau(s) having incorrect information on one or more accounts and request them to correct the data. They are required to immediately investigate your questions and situation. Further, they have a rather small window of time to correct or make the decision to retain your current situation. If you consider using an outside company to help you, investigate them thoroughly. Get valid references that they have legitimately helped borrowers, not just made some deals to lower your monthly payments, which you could also do yourself.

There are a number of reasons for the mystery surrounding the credit score formula. The predominant reason for the hidden information is integrity of the industry. If the FICO (named for the Fair Isaac Corporation that invented the score) formula was disclosed, some percentage of the population would design methods to circumvent the “system”, thereby bring the integrity of every credit score into question. Much as the Internet search engines keep their ranking formula a secret to avoid artificial manipulation, having credit scores explained in terms of their algorithms would open the door for potential abuse by some. While FICO is by far the best known score, there are other credit scoring systems in the market, including the VantageScore, CE Score, and NextGen systems.

You can find the “basic” components of a credit score formula. Here they are:

• 35% - Regularity of making payments as agreed;
• 30% - Amount of debt – ratio between current outstanding debt as a percentage of all of your revolving credit limits;
• 15% - Length of your credit history;
• 10% - Kinds of credit you use – revolving, credit card, installment, mortgage;
• 10% - Amount of new credit and number of recent inquiries from lenders.

Credit scores provide a “snapshot” of your overall tendency to use credit and your pattern of repayment. Numerically, the highest credit score you could achieve is 850, while the lowest is 300. This number, predominantly a “FICO” credit score, gives potential lenders, employers, insurance companies, and landlords an idea of your creditworthiness and responsibility.

A credit score calculation is not so easily explained. Credit report scores are computed using a complex algorithm. More importantly, the credit score formula is a closely guarded secret. Although frustrating, there are very sound reasons for this level of secrecy. While almost everyone is honest, the publication of the way to calculate credit scores would immediately be analyzed by those who do not make up the “honest population.” These credit “hackers” could use these algorithms to construct ways to beat the system and design ways to increase their credit scores. Therefore, much like the formulae used by Internet search engines (Google, Yahoo, Dogpile, etc.), credit score explanations are kept secret.

A mortgage credit score is a bit different from a standard consumer credit score in the scope of its investigation and information. A mortgage credit report normally encompasses 3 credit scores. This report will usually include a Trans Union, Equifax, and Experian credit score, often called a “merged” credit report or 3 in 1 credit score. These are the three national credit bureaus that sometimes have slightly different information in their data bases. This merger of the three national will indirectly generate a FICO score mortgage rate from most major lenders.

In recent years, most national mortgage lenders have modified their criteria to create “credit score loans”, the terms of which are greatly influenced by your credit score. In the area of low credit score mortgages, the minimum credit score for mortgage approval can be critical to your success or failure of getting the loan you want. The current average American credit score is estimated at 676 and many mortgage rates by credit score loan products are available. While the average US credit score varies, sometimes by 20 points or more, from city to city, most major mortgage lenders will have a menu, based on credit score estimators that reflect the national average.

Finally, this is not “secret” information. Lenders publish the credit score needed for mortgage approval of their products. While correlating credit score and mortgage rates can be frustrating, if you conduct credit score monitoring of your report, you will develop a good idea of the credit score ranges that apply to various mortgage products. This knowledge will help you in your future mortgage credit, purchase, and refinancing decisions.

If you want to know how to get your credit score, you’ll be pleased to learn that you have options. First, you can procure online credit scores if you want a fast response. Don’t worry. Your credit information is not public and cannot be accessed by anyone, including lenders, without your express written permission. But you can obtain a free online credit score from a variety of sources when you need one. You are also able to request a credit report directly from the three national credit bureaus, Experian, Trans Union, and Equifax.

Until a few years ago, you could only obtain free credit scores if your were denied credit by a lender. Lacking that situation, you could only get your credit score if you paid for it, as lenders must. Now, however, you can obtain a free annual credit score to keep abreast of the accuracy of your report.

There are also a variety of private companies that allow you to check your credit score on a regular basis. If you notice items or data that appears to be inaccurate, you’ll want to fix these errors. You can do so by writing (no telephone calls, please) to each of the three credit score bureaus. Advise them which data you believe is wrong and ask them to correct the information. They will investigate and modify your information if appropriate.

You want the best credit score you can achieve. By getting at least an annual credit score online or from the bureaus, you will be aware of the data being reported about you. If your file shows that you need some credit score repair, you will have the information to effectively request a correction.

Depending on your current situation, there are a variety of ways to boost your credit score. The most obvious credit score booster is to pay all your debt on time as agreed. Remaining options are effective in certain situations. For instance, someone who has numerous unsecured lines of credit and credit cards, even though paying all obligations on time, will normally have a lower consumer credit score than someone with only a few open unsecured lines and a large auto installment loan. This is because the credit score formula downgrades unsecured credit lines and gives more “weight” to installment and secured loans. The payment is normally fixed and should not negatively impact your budget. So keep your unsecured and credit card maximum lines to a manageable amount.

Buying a home with a mortgage loan, which is paid on time and as agreed, will also boost your credit score. The ultimate in a secured loan, you will raise your credit score after adding a mortgage loan to your profile.

If you have had a foreclosure or bankruptcy, you can improve your credit score by opening two or three new unsecured and credit card accounts. Borrow a little and make all payments exactly on time. After 90 to 120 days, you will increase your credit score by a noticeable number.