Credit Report Nuts and Bolts: Part 4 of 6 – Credit Scoring myths and legends.

[categories: Washington Bankruptcy Attorney]

There is not just one credit score for you. Each credit bureau may have its own "credit score" calculated in an alternative manner. Thus, your "credit score" can vary over a considerable range from Equifax, Transunion or Experian. According to Fair Isaac Corporation (calculators of the FICO credit score) here is how Fair Isaac calculates your FICO score:

35% according to your payment history;

30% amounts owed on credit accounts compared to available credit – high balances relative to credit limits may indicate that you are over-extended

15% length of credit history

10% new credit – you supposedly receive a higher score if you have an established credit history and don’t have too many new accounts – opening several accounts in a short period of time can indicate greater risk

10% types of credit – Fair Isaac claims that it more favorably scores a mix of various types of credit

Shopping around for Credit – You may also have heard that a large number of credit inquiries will lower your credit score. This is not always true. Some companies and credit bureaus take inquiries into account and some do not. However, even those companies that do count a large number of inquiries against you claim taht this will have only a small impact on your score. Thus, it would seem that you should not be afraid to shop around for the best credit – if your only concern is lowering your credit score. Of course, moderation would seem to be the best recommendation here.

Getting your score – Under federal law, the credit bureaus are required to provide consumers with their credit scores upon request. The credit score IS NOT FREE, but the charge for the score will be set by the Federal Trade Commission. Mortgage lenders are also required to give you information about your credit score for free. You might check the Federal Trade Commission for the maximum allowable charge for your credit score before contacting the credit bureau(s) so that you go in prepared ahead of time.

NOTE: FACTORS FOR DENIAL OF CREDIT RULE

See Equal Credit Opportunity Act – Regulation B – Supplement I
(Official Staff Interpretations)

Sec. 202.9 Notifications

1. Use of the term adverse action. The regulation does not require that a creditor use the term adverse action in communicating to an applicant that a request for an extension of credit has not been approved. In notifying an applicant of adverse action as defined by § 202.2(c)(1), a creditor may use any words or phrases that describe the action taken on the application.

9(b) Form of ECOA notice and statement of specific reasons.
Paragraph 9(b)(1)
1. Substantially similar notice. The ECOA notice sent with a notification of a credit denial or other adverse action will comply with the regulation if it is “substantially similar” to the notice contained in § 202.9(b)(1). For example, a creditor may add a reference to the fact that the ECOA permits age to be considered in certain credit scoring systems, or add a reference to a similar state statute or regulation and to a state enforcement agency.

Paragraph 9(b)(2)
1. Number of specific reasons. A creditor must disclose the principal reasons for denying an application or taking other adverse action. The regulation does not mandate that a specific number of reasons be disclosed, but disclosure of more than four reasons is not likely to be helpful to the applicant.

2. Source of specific reasons. The specific reasons disclosed under §§ 202.9(a)(2) and (b)(2) must relate to and accurately describe the factors actually considered or scored by a creditor.

3. Description of reasons. A creditor need not describe how or why a factor adversely affected an applicant. For example, the notice may say “length of residence” rather than “too short a period of residence.”

4. Credit scoring system. If a creditor bases the denial or other adverse action on a credit scoring system, the reasons disclosed must relate only to those factors actually scored in the system. Moreover, no factor that was a principal reason for adverse action may be excluded from disclosure. The creditor must disclose the actual reasons for denial (for example, “age of automobile”) even if the relationship of that factor to predicting creditworthiness may not be clear to the applicant.

5. Credit scoring—method for selecting reasons. The regulation does not require that any one method be used for selecting reasons for a credit denial or other adverse action that is based on a credit scoring system. Various methods will meet the requirements of the regulation. One method is to identify the factors for which the applicant’s score fell furthest below the average score for each of those factors achieved by applicants whose total score was at or slightly above the minimum passing score. Another method is to identify the factors for which the applicant’s score fell furthest below the average score for each of those factors achieved by all applicants. These average scores could be calculated during the development or use of the system. Any other method that produces results substantially similar to either of these methods is also acceptable under the regulation.

6. Judgmental system. If a creditor uses a judgmental system, the reasons for the denial or other adverse action must relate to those factors in the applicant’s record actually reviewed by the person making the decision.

7. Combined credit scoring and judgmental system. If a creditor denies an application based on a credit evaluation system that employs both credit scoring and judgmental components, the reasons for the denial must come from the component of the system that the applicant failed. For example, if a creditor initially credit scores an application and denies the credit request as a result of that scoring, the reasons disclosed to the applicant must relate to the factors scored in the system. If the application passes the credit scoring stage but the creditor then denies the credit request based on a judgmental assessment of the applicant’s record, the reasons disclosed must relate to the factors reviewed judgmentally, even if the factors were also considered in the credit scoring component. If the application is not approved or denied as a result of the credit scoring, but falls into a gray band, and the creditor performs a judgmental assessment and denies the credit after that assessment, the reasons disclosed must come from both components of the system. The same result applies where a judgmental assessment is the first component of the combined system. As provided in comment 9(b)(2)-1, disclosure of more than a combined total of four reasons is not likely to be helpful to the applicant.

8. Automatic denial. Some credit decision methods contain features that call for automatic denial because of one or more negative factors in the applicant’s record (such as the applicant’s previous bad credit history with that creditor, the applicant’s declaration of bankruptcy, or the fact that the applicant is a minor). When a creditor denies the credit request because of an automatic-denial factor, the creditor must disclose that specific factor.

9. Combined ECOA-FCRA disclosures. The ECOA requires disclosure of the principal reasons for denying or taking other adverse action on an application for an extension of credit. The Fair Credit Reporting Act (FCRA) requires a creditor to disclose when it has based its decision in whole or in part on information from a source other than the applicant or its own files. Disclosing that a credit report was obtained and used in the denial of the application, as the FCRA requires, does not satisfy the ECOA requirement to disclose specific reasons. For example, if the applicant’s credit history reveals delinquent credit obligations and the application is denied for that reason, to satisfy § 202.9(b)(2) the creditor must disclose that the application was denied because of the applicant’s delinquent credit obligations. To satisfy the FCRA requirement, the creditor must also disclose that a credit report was obtained and used in the denial of the application. Sample forms C-1 through C-5 of Appendix C of the regulation provide for the two disclosures.

http://www.bankersonline.com/regs/202/s202-9.html – source of Factors For Denial of Credit Rule – along with National Consumer Law Center’s "Guide to Surviving Debt", available for about $20.00 from www.consumerlaw.org.

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