History and Development of FICO Scores

For several decades, lenders have focused on developing scoring models to accurately analyze a borrower's credit history and current status. The assignment of a number value to various aspects of that profile and a totaling of those values allow lenders to arrive at an overall credit "score."
The numerical score range is 375 to 900 points. The scores are available through three national credit data repositories: Equifax, Trans Union, Experian scores. The names of the scoring programs for each credit bureau appear in parenthesis. 

  • Equifax (Beacon)
  • Trans Union (Empirica)
  • Experian (Experian/Fair Isaac)

All three models are referred to as "FICO".

For the FICO score, every borrower starts at 850. An amount is then subtracted for each "risk" item in a credit profile. This results in a number by which we can compare borrowers to each other and to delinquency and foreclosure records.

  • Borrower starts with a score of 850.
  • 1 x 30 late on a VISA card could have a value of - 40
  • A two year old, Chapter 7 Bankruptcy could have a value of -200
  • A mortgage foreclosure could be valued at -250
  • 6 new credit inquiries in the past 90 days could be worth - 50
  • Totaled and subtracted from 850, these values result in a score of 390

This extreme over-simplification is what the Fair Isaac Company has done in developing their FICO scoring model.

How do mortgage lenders use FICO scores?

They use them as a guide to determine which loan programs their clients qualify for.

FHA/VA Loans: Scores must be 585 or greater.

Conventional Loans: Due to contract negotiations with Fannie Mae (FHMA) and Freddie Mac (FHLMC), loans with credit scores below 620 where the loan to value (LTV) is greater than 90.01% can no longer be approved. Additionally, bankruptcies, foreclosures and deeds in lieu (due to financial mismanagement) can no longer be approved with credit scores below 660, regardless of age. All loans with credit scores below 620 (660 with bankruptcy, foreclosure or deed in lieu) require a second level review. These new guidelines became effective with loan applications taken on or after May 15, 1997. There are no exceptions, regardless of the strengths of the collateral or capacity components of the loan.

Under no circumstances will a loan be denied or rejected based solely on credit scores. If a low credit score is a factor in a loan denial or rejection the underlying reason behind the credit score will be the basis of the decision.

Low/High FICO Scores

Freddie Mac has given us an indication of low vs. high scores on their Gold Measure Worksheet.

The following scale assesses Risk Units (RUS) for a borrower:

Score RUS
Over 790 -16
771 - 790 -14
761 - 770 -11
731 - 760 -7
721 - 730 -5
701 - 720 0
681 - 700 6
661 - 680 8
641 - 660 12
621 - 640 17
601 - 620 20
581 - 600 23
541 - 580 25
541 or less 32

Borrowers with a score above 760 are in the "high" range. The score is positively compensating.

Borrowers with a score between 680 and 760 are in the "mid" range. The score does not add anything to the files, but does not detract.

Scores from 680 to 620 are low but can be acceptable. Approvals must be justified carefully and files documented thoroughly.

Scores below 620 are very "low" and may not be acceptable for conventional financing.

A score below 540 is probably prohibitive.

Reason Codes: In addition to the FICO score, each credit report will also show four reason codes. The reason codes identify areas of the borrowers credit profile warranting attention; they tell you why the credit score is as it is.

Things to Remember About FICO Scores:

The FICO score already takes into consideration:

  • Types of delinquent accounts
  • Number of accounts borrower has managed without a delinquency
  • Recency or age of delinquency

The FICO score does not take into consideration:

  • Inquiries made for account monitoring of promotional purposes are not factored into credit scores.
  • Credit scores do not consider occupation and length of time in present house.

Other than derogatory credit, some of the factors that negatively affect the FICO scores are:

  • Number of credit accounts the applicant has
  • Amount of available credit the applicant has used (balances vs. limits)
  • Source of the applicants existing credit (revolving vs. installment or bank loans vs. finance company loans).
  • Number of attempts applicant has made to obtain credit (inquiries).

How to Dispute Credit Report Errors

Your credit report is a type of consumer report, it contains information about where you work and live and how you pay your bills. It also may show whether you have been sued, arrested or have filed for bankruptcy.

Companies called Consumer Reporting Agencies (CRA”s) or Credit Bureaus compile and sell your credit report to businesses. Because businesses use this information to evaluate your applications for credit insurance, employment, and other purposes allowed by the Fair Credit Reporting Act (FCRA), it's important that the information in your report is complete and accurate. Some financial advisors suggest that you periodically review your credit report for inaccuracies or omissions. This could be especially important if you're considering making a major purchase, such as buying a home. Checking in advance on the accuracy of information in your credit file could speed the credit granting process.

Getting Your Credit Report

If you've been denied credit, insurance, or employment because of information supplied by a CRA, the FCRA says the company you applied to must give you the CRA's name, address, and telephone number.

If you contact that agency for a copy of your report within 60 days of receiving a denial notice, the report is free. In addition, you're entitled to one free copy of your report a year if you can prove that:

  1. You're unemployed and plan to look for a job within 60 days.
  2. You're on welfare.
  3. Your report is inaccurate because of fraud.

Otherwise, a CRA may charge you for a copy of your report.

If you simply want to purchase a copy of your report, call the CRAs listed in the Yellow Pages under "credit" or "credit rating and reporting". Call each credit bureau listed since more than one agency may have a file on you, some with different information. The three major national credit bureaus are:

  • Equifax: (800) 685-1111
  • Experian (formerly TRW): (888) 397-3742
  • Trans Union: (800) 916-8800

Correcting Errors

Under the FCRA, both the CRA and the organization that provided the information to the CRA, such as a bank or credit card company, have responsibilities for correcting inaccurate or incomplete information in your report. To protect all your rights under the law, contact both the CRA and the information provider.

Tell the CRA in writing what information you believe is inaccurate. Include copies (NOT originals) of documents that support your position. In addition to providing your complete name and address, your letter should clearly identify each item in your report you dispute, state the facts and explain why you dispute the information, and request deletion or correction. Credit Repair Kits with sample letters are made available to you through Residential Mortgage. The letters are on diskette in Microsoft Word format so you will not have to re-type them.

Send your letter by certified mail, return receipt requested, so you can document what the CRA received. Keep copies of your dispute letter and enclosures.

In addition to writing to the CRA, tell the creditor or other information provider in writing that you dispute an item. Again, include copies (NOT originals) of documents that support your position. Many providers specify an address for disputes. If the provider then reports the item to any CRA, it must include a notice of your dispute. In addition, if you are correct - that is, if the disputed information is not accurate - the information provider may not use it again.

CRAs must reinvestigate the items in question, usually within 30 days, unless they consider your dispute frivolous. They also must forward all relevant data you provide about the dispute to the information provider. After the information provider receives notice of a dispute from the CRA, it must investigate, review all relevant information provided by the CRA, and report the results to the CRA. If the information provider finds the disputed information to be inaccurate, it must notify all nationwide CRAs so they can correct this information in your file.

  • Disputed information that cannot be verified must be deleted from your file.
  • If your report contains erroneous information, the CRA must correct it.
  • If an item is incomplete, the CRA must complete it. For example, if your file showed that you were late making payments, but failed to show that you were no longer delinquent, the CRA must show that you're current.
  • If your file shows an account that belongs only to another person, the CRA must delete it.

When the investigation is complete, the CRA must give you the written results and a free copy of your report if the dispute results in a change. If an item is changed or removed, the CRA cannot put the disputed information back in your file unless the information provider verifies its accuracy and completeness, and the CRA gives you a written notice that includes the name, address, and phone number of the provider.

Also, if you request, the CRA must send notices of corrections to anyone who received your report in the past six months. Job applicants can have a corrected copy of their report sent to anyone who received a copy during the past two years for employment purposes. If an investigation does not resolve your dispute, ask the CRA to include your statement of the dispute in your file and in future reports.

Accurate Negative Information

When negative information in your report is accurate, only the passage of time can assure its removal. Accurate negative information can generally stay on your report for 7 years.

There are certain exceptions:

  • Bankruptcy information may be reported for 10 years.
  • Credit information reported in response to an application for a job with a salary of more than $75,000 has no time limit.
  • Credit information reported because of an application for more than $150,000 worth of credit or life insurance has no time limit.
  • Information about a lawsuit or an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer.

Adding Accounts to Your File

Your credit file may not reflect all your credit accounts. Although most national department stores and all-purpose bank credit card accounts will be included in your file, not all creditors supply information to CRAs: Some travel, entertainment, gasoline card companies, local retailers, and credit unions are among those creditors that don't.

If you've been told you were denied credit because of an ''insufficient credit file'' or ''no credit file'' and you have accounts with creditors that don't appear in your credit file, ask the CRA to add this information to future reports. Although they are not required to do so, many CRAs will add verifiable accounts for a fee. You should, however, understand that if these creditors do not report to the CRA on a regular basis, these added items would not be updated in your file.