Deanna Valeo

Why Time Changes Consumers' Credit Scores

Deanna and I read the following article over the weekend. I thought it did a great job outlining the intricacies associated with calculating a FICO score. Deanna and I have always tried to explain that a score represents a snapshot in time. The following will add more to credibility to this explanation. Have a great week and use this as a great reference regarding credit scores.

Why Time Changes Consumers' Credit Scores

Article from: Origination News
Article date: November 1, 2010
Byline: Lew Sichelman

Here is a scenario that happens all too frequently: A would-be homebuyer applies online to obtain his all-important credit score. It comes back at a healthy 720, good enough to qualify for the best rate in the mortgage market. But then, when he applies for a loan with a local lender, his score is much lower. So low, in fact, that he might not qualify, even at less favorable terms. What gives? How can a homebuyer's credit score be one number on one day and a completely different figure the next? And why is a homebuyer's score different from one company to another?

Well, a lot of things could be at play here. So let's start with the basics.

A credit score is a three-digit number that is considered an accurate predictor of whether or not borrowers will make their house payments on time each and every month. The higher the number, the safer the bet that a borrower will repay.

But borrowers' scores are based on the information contained in their credit record. And because what's in their file is fluid, so is their score.

"Credit is dynamic information," says Greg Holmes, national director of sales and marketing at Credit Plus, a Salisbury, Md., company that serves the mortgage business. "It's constantly changing. It's up and down and constantly moving."

Borrowers' records change every time the company that has their car loan reports an on-time payment-or more important, a missed payment that's now more than 30 days late. It changes each time their credit-card balance changes. It changes every time they apply for new credit. And it changes when that age-old bankruptcy finally falls into the abyss, never to be reported again.
Because borrowers' credit record is a moving target, shifting on a daily or even hourly basis, depending on the time of day information is imported into their file, their credit score is nothing more than a numerical snapshot of their file at the moment it is calculated. As such, it, too, can change from one moment to the next.

"It depends on how much information is coming and going in and out of that credit report," Holmes says.

"It's whatever time of day and month you pull the report. There's even a difference between an account that's less than six months old and one that's older."

If borrowers asked someone to pull their credit score today, exactly six months and 29 days after they closed a department-store account, for example, the number would be different than if they asked tomorrow, when it has been seven months since the account was shut down. Maybe not by much, but perhaps enough to alter their chances to obtain financing.

But there's more to borrowers' files-and, therefore, their score-than what's in it. In fact, another big factor is what's not in it. That is, not every creditor reports information to each of the three main credit repositories.

Say a borrower's auto lender is a local bank that reports only to Experian because Experian has a bigger presence in his state. In that case, neither TransUnion nor Equifax will know whether he is current on his car payments or if he is late. They wouldn't even know about his car loan at all. As a result, a credit score based on the borrower's Experian file will be different than one based on the records maintained by the other two big bureaus.

But wait, there's more. Each repository has its own credit-scoring formula. A Minneapolis-based analytics company known as FICO (formerly Fair, Isaac and Co.), from which the generic term "FICO score" comes, created all the formulas. But the algorithm used by each credit bureau is slightly different based on factors that each believes to be a more or less important component of risk.

So not only is TransUnion's score different than Equifax and Experian's because it is based on only information in its records; it's also different because it uses a different analytical model. And even if each depository maintained the exact same files, their scores would be different because they use different formulas.

Next, it's important to know that the mortgage industry isn't the only business to use credit scoring to rate potential borrowers. Actually, housing finance came somewhat late to the technique. The insurance business has been grading potential customers for decades, and now auto lenders, finance companies, banks, employers and dozens of others use credit scoring to make decisions.
The key is that each business has its own scoring formula. And a score that may be acceptable to, say, the finance company offering to lend borrowers $5,000 for a new roof probably won't be acceptable to a mortgage company trying to decide whether to lend them $500,000 to buy a new house.

So if borrowers received their score from one of the Internet sites that provide a free score-but try to hook them into paying a monthly fee to monitor their credit file-it's a safe bet that that number, accurate or not, won't be worth diddly if they are in the market to buy a house.

Indeed, if borrowers are buying a house, they'll want an industry-specific mortgage score. No other score will do.

"Anybody can calculate a score," says Holmes. "Who accepts it is what really matters. Even the scores used in the mortgage industry wouldn't mean anything if Fannie Mae or Freddie Mac didn't accept them. Or if JPMorgan Chase or Wells Fargo or Bank of America didn't accept them."
Borrowers can obtain a free copy of their credit record from each of the three major credit bureaus at The law entitles them to one free report every 12 months from each repository, but there's nowhere I know of to obtain a free credit score.
Many outfits offer "free" credit scores, but in most cases, borrowers have to sign up-for a monthly fee-for a credit-monitoring service.

"Once you apply," says FICO representative Craig Watts, "you have to get in up to your elbows before you reach the point where you can get a score."

Borrowers usually can opt out of the service after a trial period. But the companies are hoping they won't, or that they'll forget and won't pay much attention to their credit card bill when it arrives in the mail.

But remember, not every score is acceptable to mortgage lenders. I'm aware of only one online service that fits the bill, But even then, borrowers will have to sign up for the Score Watch monitoring service that FICO offers in conjunction with Equifax. They'll just have to remember to cancel the service before the "free" trial period runs out.

Beyond that, would-be homebuyers can obtain meaningful credit scores by applying for a mortgage, either directly with a lender or with a broker who deals with several different lenders. Once borrowers apply, lenders are obligated by law to share the score they used as a basis to decide whether they qualify or not.

And once borrowers obtain a satisfactory credit score, make sure that they don't do anything credit-wise that will change it, at least not until after the loan closes.

Remember, a credit score is a moving target, so if borrowers run out and buy new furniture on time, their score will suffer, and they may no longer qualify for a mortgage to buy their house.

All our best for the upcoming week.

@ The Valeo-Croy Team, we are here for you.

The Valeo-Croy Team - (704) 366-7711
Todd Croy - NMLO license #91428
Deanna Valeo - NMLO license #91421
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The Valeo-Croy Team and Cunningham and Company Mortgage Bankers are Equal Housing Lenders.This information is for illustration only. It does not constitute an application for a loan or an offer or commitment for Cunningham and Company to make a loan on these terms. Interest rates are subject to change until an application is completed and you lock in your interest rate. The figures noted are estimates and may vary depending on discount points, taxes and insurance. Programs, terms and conditions are subject to change without notice. Mortgage loans are subject to credit qualifications. Normal credit standards apply. Date: 11/29/2010

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