Credit Repair 101

Credit Scoring

Within the last year or two, creditors have become increasingly dependent upon credit scoring. Credit scores (also known as risk scores) are a numerical interpretation of your credit profile. The score predicts how likely consumers in a specific score range will repay their debts. TRW, for example, uses the Fair Isaac Model (FICO) to determine a risk score with a range from 200 to 900. The higher the number, the better the credit history.

With the advent of the credit scoring revolution, many lenders require borrowers to have acceptable credit scores to obtain a mortgage. In late 1996, for example, the Federal National Mortgage Association (Fannie Mae) instituted minimum acceptable credit scores for all loans they purchase. Many people who once qualified for a mortgage under Fannie Mae guidelines now have to turn to alternative sources for financing a home. This translates into higher interest rates, prepayment penalties for early retirement of the loan, and a larger down payment on a home purchase.

Every aspect of your credit profile affects your credit score. Since your credit score is a statistical interpretation of your credit history, certain behaviors will either have a positive or negative impact upon your credit score. Consistently paying your bills late, declaring bankruptcy or carrying a large number of credit cards will dramatically lower your score. An inquiry, for example, will lower your FICO score by nine points and if you are out looking for a car and allow 20 dealers to look at your credit, your score will be lowered by 180 points! That could be the difference between a 7% interest rate on a mortgage and a 13% interest rate with a much larger down payment. Conversely, positive behaviors will help increase your credit score such as consistently paying your bills on time, keeping your overall debt at a reasonable level relative to your income or responsibly using several credit cards.