CREDIT SCORE FACTS AND FALLACIES
Although these factors make up a credit score, the exact algorithm developed by FICO is an unknown to the consumer. In fact, the scoring method is tweaked at times if there appear to be inconsistencies or consumers have found ways to cheat the system.
For instance, it became known that being an authorized user on a credit card account would help a person's score, if the account was in good standing.
Say that a parent had excellent credit with scores in the 8oos. By putting his son on the credit card account as an authorized user, whether the son ever received a credit card from his parent's account to use, the son would soon see his scores begin to go up because his parent's credit patterns from that credit card would transfer to him.
The son would see the benefit of his parent's credit histories without establishing any credit himself. There were even advertisements to folks with damaged credit, encouraging them to become authorized users on cards belonging to people they would never even meet — as long as they paid a fee. The authorized user would never get a credit card but would, in fact, get the benefit of that credit card's payment history. This was an oversight in FICO's scoring model that was soon corrected.
FICO keeps its scoring model locked deep in its closet, but individuals are always trying to figure out any idiosyncrasies to game the system. There are some general things we know about the FICO model, such as which factors weigh more heavily on computing a credit score, but the permutations of all the possible combinations would be nearly impossible to calculate. But there are some things we do know.
Credit scores pay close attention to the most recent 24- month history and less so beyond that. Even with a bankruptcy or collection accounts in the past. For instance, a few years ago a guy got hurt in an automobile accident and was unable to work for several months and got behind on his bills. Some of them even went to collection, and he saw his credit scores tumble. His scores went from 740 to 580 in a heartbeat.
But he got back on his feet and returned to work. He began to pay off his collection accounts and got caught up on his other accounts and paid his balances down. His scores didn't improve immediately, but eventually they did after about 18 months.
Scoring models don't work with an isolated incident. Rather, they try and determine if there's a pattern beginning to emerge in a credit file. One late payment by itself won't damage a credit score much, but several late payments over an extended period certainly will because it shows a pattern.
Credit scores are designed to reflect the likelihood of default. And recent history is more of an indicator than something that happened 10 years ago.
Even though you get three credit scores, one from each bureau, the lender will throw out the highest and the lowest — and will use the middle score. They're not averaged together as some think. Nor are two people's credit scores averaged when they apply for a mortgage together.
If a couple were to apply together for a mortgage, that would make for six credit scores, right? Lenders would look at the lowest of the middle scores for each applicant. If the husband has a 720 middle score and the wife has a 520 score, they might not get approved because the lender would use the 520 score for purposes of underwriting the loan.
In this instance it might be possible to have the husband apply for the loan on his own and leave his wife off the loan entirely. Her credit score and her credit rating would be off the table.
As long as the husband's income is sufficient to buy the property and still have acceptable debt ratios, then the husband can be on the mortgage by himself. However, if the wife's income is needed to obtain acceptable debt ratios and she has poor credit, the loan would be declined due to low scores.
Often, a dispute with a creditor shows on the credit report. A common dispute I've seen is from tenants breaking their lease with a landlord. The former renter may think that he or she will simply lose the deposit and move on. But some apartment management companies will still want the money for the months remaining on the lease.
The consumer applies for credit and sees a collection account with his former landlord. Perhaps the consumer disagrees because he gave his 30-day notice and he lost his deposit. But the apartment is still trying to collect two months of rent. The consumer doesn't budge, but on the advice of a friend, writes a letter to the credit bureaus explaining his side of the story.
This is called a “dispute” letter and is kept in the consumer's file for all potential lenders to review. In fact, now the credit report will read something like “Consumer Dispute” to let a lender know the consumer disagrees with the report.
But this is old school. Lenders don't read letters anymore. In fact, they usually just rely on the score and don't even review credit reports. Credit scores are pulled electronically; there's no protocol for reading a dispute letter. So, although it's perfectly legal to write one, it is likely a waste of time.