CREDIT SCORE

What Is a Credit Score?

A credit score is a measure of your credit worthiness. The most common credit score is called the FICO score because it was developed by the Fair Isaac Company. The higher the FICO score, the greater the likelihood that the debts of the borrower will be repaid on time.

FICO scores range from 350 to 850. According to Fair Isaac, the median score over the entire population is about 715, with 20% above 780 and 20% below 620. The minimum score required to qualify for the lowest mortgage rate is about 740, but it varies from lender to lender, and often depends on other characteristics of the transaction. It also depends on the state of the market, and during the financial crisis it rose closer to 780.

Credit scores have speeded up the process of making loan decisions, and have largely eliminated personal bias and subjectivity in the decision process. The major downside is the possibility of data error. FICO scores are based entirely on information taken from credit reports. If the credit report is contaminated by erroneous or incomplete information, the FICO score will also be contaminated.

Will the Passage of Time Improve Your Credit Score?

The Federal Fair Credit Reporting Act puts farther time on your side by setting limits on how long negative information can appear in consumer credit records. Once a piece of information has been on a consumer’s record for the prescribed period, it is supposed to drop off. Once off, it will no longer affect your credit score.

The prescribed periods are as follows: inquiries about you from credit grantors, 2 years; late payments, mortgage foreclosure, collection accounts and chapter 13 bankruptcy, 7 years; chapter 7 bankruptcy, 10 years; unpaid tax liens, forever.

Even before negative information drops off a credit report, credit scoring will give it lower weight as it ages. However, this doesn’t do borrowers any good unless they generate new positive credit information. Old bad stuff plus recent good stuff generates a rising credit score.