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Credit Scoring: What it is, and How It Affects You
Peter Lenkefi
If you have applied for a mortgage in the past five years, you’ve probably
heard of credit scoring by now. Perhaps you were told that your credit
scoring was wonderful, or needed work. Or maybe your mortgage would have been lowered by several points, if you had better credit scoring.
Credit scoring models, as the industry calls them, started to become widely
used around 1994. Two secondary market players, Fannie Mae and Freebie Mac, started creating automated underwriting programs around this time, and this is how credit scoring came to be the way it is today. Both auto lenders and credit card issuers have used these types of systems for years – well before the mortgage brokers did.
The aforementioned companies that started to use these processes about 10
years ago now thought it was strange that someone could walk into an auto
dealership, and two hours later drive away with a $100,000 car – but a
potential homeowner couldn’t do the same thing. Which made no sense, because
cars depreciate over time, and can get lost or stolen – but houses usually
appreciate, and are fixed in location. So, using this logic, the industry
movers and shakers decided that if the car buying process was this easy,
then home buying should be as well.
Although in theory this sounds quite amazing, it’s only been recently that
this has actually been the reality of the process. This is partially because
the credit scoring models have become more refined over the years. And now, almost all mortgages are determined using some sort of credit scoring
process.
These mortgage brokers usually use some sort of credit reporting agency to
get information about someone who has applied for financing, or credit
scoring, with them. But what most people don’t know is that there are two
different kinds of credit reporting agencies whose information determines
your credit scoring. The first is the four big credit agencies: Innovax,
Equifax, TransUnion and Experian. When a person gets credit, or even applies
for credit, this is reported back to these credit agencies, and kept on file
indefinitely. Files are updated, usually, on a monthly basis. However, these
credit scoring agencies only accept the information as it is given to them;
there is no fact checking process to ensure that your credit scoring is
accurate.
Credit scoring agencies will also get information on a consumer applying for
a mortgage using other sources, such as the Department of Motor Vehicles,
the Medical Information Board, the FBI, local law enforcement agencies,
county records, government records, and the like. The mortgage industry has
a repository of their own for information about people they give credit to,
which can be accessed in a pinch if required, so that those who are bad
credit risks don’t get a good credit scoring.
For more more information about credit scoring please visit
http://www.moneytipsdaily.com/Money-Tips/Credit-Abuse-You-May-Be-an-Innocent-Victim-and-Not-Know-It.html
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