Washington Post article on FICO

Discussion in 'Credit Talk' started by ledo, Jul 18, 2001.

  1. ledo

    ledo Well-Known Member

    Article of some interest. Your thought would be appreciated. Before I forget, this article is part one in a two part series.

    Bad FICO Mark? Rescore Your Credit

    By Kenneth R. Harney
    Saturday, July 14, 2001; Page H01

    First of two articles

    You've probably heard that American mortgage applicants now have ready access to those once-secret, triple-digit numbers that pigeonhole them as good financial risks or bad -- their credit scores.

    But you might not have heard of a fast-growing service that can dramatically improve your loan prospects almost overnight: "rapid rescoring." This is a service now offered by dozens of local credit-reporting agencies around the country; it allows mortgage loan officers to request a rescoring of applicants' credit files at each of the three giant credit repositories -- Equifax, Experian and Trans Union.

    At the request of the loan officer, a local credit-reporting agency analyzes an applicant's files, obtains written corrections from creditors of any mistaken information in the files, and advises the applicant on how to restructure certain open credit lines to raise credit scores. Sometimes scores can be boosted by 40 to 100 points or more in less than a week -- all fully within the law and with the cooperation of the credit repositories themselves.

    With a higher score, borrowers may qualify for lower mortgage rates, lower loan fees and better terms overall. Corrective rescoring can save consumers tens of thousands of dollars in long-term debt, and alert them to negative information sitting in their credit files.

    Consider the case of Alexandria C. Phillips, a lawyer who lives near Los Angeles. She recently sought to refinance a condominium she owns in Newport Beach and to buy a new house in Laguna Beach. Her idea was to pull money out of the condo and use it to help with the down payment on the house.

    When she applied for mortgage money through a local broker, however, she was told that her "credit scores don't look too good." Phillips was tied up with a heavy courtroom schedule and didn't ask what her scores were or why they were low. She asked the broker to get the best terms she could get under the circumstances to buy the house and refi the condo.

    The credit scores the broker referred to were "FICO" scores, the predominant quick-reference credit-analysis tool used by mortgage lenders, credit card issuers and others. FICO stands for Fair, Isaac and Co., the developer of the scoring models that ranks applicants in terms of their relative likelihood to pay their debts on time.

    FICO scores are generated by proprietary computer programs licensed by Fair, Isaac and housed at Equifax, Experian and Trans Union. Individuals' full, electronic credit files are run through the software and evaluated for risk patterns by the statistical models. Though long kept secret from consumers by contractual requirements, FICO scores are now easy to obtain. Fair, Isaac and Equifax provide them on the Internet for a nominal charge (www.myfico.com), and the other repositories provide proprietary-scoring advisory information as well.

    In Phillips's case, her scores when pulled on May 23 were 597 (Experian), 569 (Trans Union) and 580 (Equifax). Scores at the three repositories usually differ because of different creditor information in their files.

    Phillips's scores were, in a word, horrible. To qualify for the best loan quotes, borrowers generally need scores of 700 or better. Scores under 620 are "sub-prime" -- and produce significantly higher quotes on interest rates and fees. Phillips's broker referred her application to a lender specializing in sub-prime, damaged-credit mortgages. The lender, in turn, sent Phillips's files to one of the country's most prominent rescoring experts, Richard Lefebvre, president of AAA American Credit Bureau in Flagstaff, Ariz.

    Lefebvre immediately began checking out the negatives ("derogatories" in credit lingo) in Phillips's file. One by one, with Phillips's help, the derogatories turned out to be long-standing errors on her credit files: an incorrect report of a delinquent payment on a credit card; a Mercedes listed as "repossessed" in her file that actually belonged to someone else; an incorrectly listed "collection" action against her for $1,054 in 1995. After requests from Lefebvre, all were corrected by fax and sent directly to the repositories.

    Lefebvre also noticed that Phillips routinely put bills from her law office onto several credit cards. But the balances outstanding when the FICO scores were pulled were nearly at the limit on the cards. High credit balances relative to card limits are a major no-no for FICO scores: When your limit is $10,000 and you've got a $9,800 balance, your score takes a hit. So Lefebvre had Phillips pay off or redistribute balances so that no card or credit line had a balance near the limit.

    The result? Within five days, Phillips's FICO scores jumped 200 points -- taking her from a 580 to a 780, and from a high-risk mortgage applicant to an A-plus cream puff.

    Next week: Rescoring dos and don'ts.

    Harney's e-mail address is kenharney@aol.com.

    © 2001 The Washington Post Company

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