Understanding FICO scores in 2012

How to Understand FICO Scoring and Manage Your Credit Profile Continuing Education Credits Offered by: Mark Taylor CDPE, CSSPE, CMPS, REDS Arizona Academy of Real Estate 10207 N. Scottsdale Rd., Scottsdale, AZ 85253 (623)-505-5380 AZRE License #S05-0009

The Credit Reporting WorldThe Credit world was not invented forus. Rather it was put together throughthe relationship between the CreditReporting Agencies (CRA’s) and theCreditors themselves2 It’s not Fair 

FICO Scoring Fair, Isaac & Co. (FICO) developed a unique software which is actually an algorithm. The FICO matrix takes into account important factors and calculates a score between 300 and 850. Creditors can now rate your credit worthiness much easier. What does this mean?3

Credit Clean Up It means that we can essentially improve our FICO score by correcting and manipulating what shows up on our credit If we understand what factors affect our FICO score, we can manage it better.4

What People Believe 26% Do Not Believe Income Affects FICO Score 74% Believe Income Influences FICO Score5

What People Think 29% Know the Meaning of a Credit Score 71% Do Not Understand Credit Scoring6

What People Know 43% Are Aware Insurance Carriers Consider FICO Scores 53% Unaware Insurers Consider FICO Scores7

Building a Scoring Model  Large sample of people with similar characteristics are analyzed  measurements associated with aspects of creditworthiness are analyzed  Each factor of credit worthiness is assigned a ‘weight’ based on how strong a predictor it is of who would be a good credit risk8

Building a Scoring Model Why was Credit Scoring Developed?  To take away the human factor when determining a borrower’s qualifications  Establish more predictive results from quantitative analysis  Generate a more reliable system of evaluating credit9

What Your Credit Report Discloses  Personal identification information  Detailed credit account information  Payment history  Account identification  Chronological history  Public record information  Credit report requests  Consumer statement10

What’s In a FICO Score 10% Type of Credit Used 10% New Credit 15% Length of 35% Payment History Credit History 30% Amounts Owed11

What’s NOT in a FICO Score?  Race, Color, Religion, National Origin, Sex and Marital Status  Age  Income  Savings  Where you live  Child/Family support obligations or rental agreements  Consumer inquiries or promotional inquiries  Any information NOT found on your Credit Report12

Primary Factors That Affect FICO Score 1. Previous Performance 2. Type of Credit Revolving Installment Mortgage13

Primary Factors That Affect FICO Score 1. History with Creditors 1. Balance-to-Limit Ratio of Revolving Accounts14

Primary Factors That Affect FICO ScoreNumber of Accounts with Balances The Mix of Accounts15

Primary Factors That Affect FICO Score Pursuit of New Credit Public Records or Collections16

The 10 Most Common Reasons for Reduced Credit Scores 1. Serious delinquency 2. Time since delinquency too recent or unknown 3. Amount owed on accounts 4. Public record or collection filed 5. Level of delinquency on accounts 6. Number of accounts with delinquency 7. Proportion of balances to credit limits on revolving accounts is too high Source: Credco 8. Length of time accounts have been established 9. Too many accounts with balances 10. Inquiries17

Loan Application FOUR FACTORS: 2. Employment/Income 3. Assets/Down Payment 4. Credit/Debt FICO Score 5. Property18

FICO Scoring & Mortgages How Big of a Role does FICO Play in Lending? Just since January of 2009, the minimum FICO score requirement of an FHA loan has escalated January 560 March 580 May 600 Currently 620* FHA does not have a minimum FICO score requirement, but investor overlays installed for the secondary market *Minimum FICO Score is 580. Scores between 620 and 580 are handled by fewer investors and are much more difficult to approve19

FICO Scoring & Mortgages How Big of a Role does FICO Play in Lending? Conventional Loans: The minimum FICO score required before you have to start paying a penalty in pricing is: 74020

Rapid Rescore  Available through most local bureaus  Can take as little as 72 hours  A very misunderstood concept  Re-scoring can not change a bad scoring history  Universal Change Form21

Possible Reasons to Re-Score Erroneous payment history information Incorrect account balances Accounts discharged through BK that show as charge offs Accounts that show heavy use of available credit Missing accounts containing on-time payment histories22

What do the letters U, I J & A, etc. represent on my report?  U: Undesignated. Not designated by creditor  I: Individual Account  J: Joint Account  A: Authorized user of someone else’s account  C: Co-maker  S: Shared Joint Account  B: Co-signor, responsibility only on default  T: Terminated (closed account)23

How Long They Report Item of Negative Impact Time Reported 10 years from the date of Bankruptcy: entry for order of relief 7 yrs. from the date of Lawsuits and Judgments: entry/satisfaction or statute exp. Tax Liens-Paid: 7 years from payment Tax Liens-Unpaid: No limitation 7 years from the date of Collections/Charge Offs: last activity Criminal Record: No time limit Other Adverse: 7 years24

About Collection Accounts When a debt is not paid over time, eventually the creditor will charge the account off and sell the debt to a collection agency for approximately 20 cents on the dollar. The collection agency will try to collect the full amount of the debt from the borrower.25

About Collection Accounts What is important to note here is that the FICO matrix measures only activity on a collection account and does not differentiate from a payment or a creation of a new account. Hence, seasoning without activity is desirable on collection accounts. Paying a collection account can actually lower your FICO score substantially.26

FICO – The Bottom Line  FICO Scoring is an important lending tool because it is objective consistent and predictive  The formula and factors that go into the scoring model are considered proprietary  Scores range between 300-850  Mortgage lenders use the middle of the three scores  Minimum FICO score for Mortgage Lending is 620* *Minimum FICO Score is 580. Scores between 620 and 580 are handled by fewer investors and are much more difficult to approve27

Establishing New Credit You’ll need to have 3 open and active tradelines: Obtain Share Secured Credit Cards Try to keep Revolving Debt to under 50% of the Credit Limit28

How long After? FHA Bankruptcy 2 years from discharge date Chapter 7 1 Year of on time payments on the reorganization of Chapter 13 debt Foreclosure & Deed in Lieu Foreclosure 3 years from completion date Deed in Lieu Short Sale All credit perfect for 12 No time restriction, as long as proceeds from months, including Mortgage short sale serve as payment in full Any derogatory credit 3 years from completion date29

How long After? Conventional Bankruptcy 4 years from discharge date Chapter 7 2 years from discharge date/Four years from Chapter 13 dismissal date Foreclosure Foreclosure 7 years from completion date Short Sale & Deed in Lieu Short Sale 2 years from completion date with 80% max LTV; 4 years from completion date with 90% max LTV; Deed in Lieu 7 years with all other LTVs30

Ways a short sale could report on your credit report  Show nothing stating that a short sale occurred Computer network access  Show account was settled for less  Show a running late pay *** Important to note that even if the credit report does not report the short sale. The underwriter will notice that there was a recent mortgage on the credit report and they can ask to see the HUD 1 from the sale ***Will want to draft a protest letter in this case.31

Q: So which is worse for my FICO score: Foreclosure or short sale? A: It depends…32

Free Access to Credit Reports annualcreditreport.com or 1-800-322-822833

Step by Step Strategy to Repair your Credit Determine your credit status: tri-merge credit report with 3 FICO scores Determine what you want to correct Draft a letter of protest State what is wrong, why it is wrong and what is correct34

Step by Step Strategy to Repair your Credit Send the letter Certified Mail with return receipt Measure the 30-day period of time35

Step by Step Strategy to Repair your Credit Watch out for the “Go Away Letter” Follow Up & Re-check FICO’s36

Credit Reporting Agencies Trans Union 800-916-8800 or PO Box 1000 714-738-3800 Chester, PA 19022 $9/each at 1st prompt #3 www.transunion.com Experian 888-397-3742 PO Box 9556 Allen, at 1 prompt #4, 2 st nd $9/each TX 75013 prompt #1 www.experian.com Equifax PO Box 740241 800-685-1111 $9/each Atlanta, GA 30374 www.equifax.com37

Letter of Protest Sample FORM 1 Date Credit Bureau 500 Main St. Anytown, CA 90000 Re: Complaint Letter to Delete Inquiries Dear Sir/Madam: I received a copy of my credit report and find the following items to be in error. See the attached copy of the credit report, with these item numbers written next to the problem entries. (Describe) Item 7 This account was timely paid Item 14 This was not my obligation to pay By the provisions of Section 611 of the Fair Credit Reporting Act of 1970, I demand that these inquiries be reinvestigated and deleted from my record. Send me names and addresses of individuals you contacted so I may follow up.38

Letter of Protest Sample (cont.) I shall assume that 30 days constitutes “reasonable time” for re-verification of these entries unless you notify me otherwise immediately. It should be understood that failure to re- verify these items within 30 days constitutes reason to promptly drop the information from my file according to Section 611(a). Also, pursuant to Section 611(d) of the Fair Credit Reporting Act, please send me notification that the items have been deleted. You may send an updated copy of my credit report to the address below. According to the provisions of Section 612, there should be no charge for this notification. Sincerely, ______________________ Signed ______________________ Name (Printed) ______________________ Address _____________________ City, State, Zip ______________________39 Social Security Number

Commercial Credit Repair  Credit repair companies use the same tools like the FCRA, the Fair Debt Collections Act and Acts under the Credit Repair Organizations Act to legally attempt to improve your credit file  They must be bonded in order to accept up front monies to begin work  Legal Credit Repair companies must give their clients three documents prior to starting work on their credit file: 1. Credit file rights by State and Federal law 2. Notice of Cancellation (3 day right of rescission) 3. Agreement of services performed, time period and fee charged, all in bold print40

Commercial Credit Repair How does a Credit Repair company evaluate your file?  Review your credit on a broad scope to determine your credit’s overall ‘make up’  Observe what’s missing, not just what’s wrong with your file  Determine what steps can be taken IMMEDIATELY to make the largest impact in the shortest amount of time  Acting within the law, dispute accounts, based on incorrect information, improper disclosure or unverifiable data.41

Commercial Credit Repair Is it worth it?  Has your situation stabilized?  What do you have to gain?  Lower mortgage rate  Lower interest rate on automobile loan  Lower homeowner/auto insurance programs  Examine your credit for potential score improvement  Determine what may or may not improve on your report  Establish a long-term plan to maintain improved score42

Commercial Credit Repair Is it worth it?  Typical fees for Credit Repair range between:  $700-$900 for an individual  $1,100-$1,500 for joint credit files  Calculate potential savings as a result of improved credit score  $100-200/month refinancing your current mortgage?  $150/month purchasing a new auto  $500/year on homeowners and automobile insurance43

Identity Theft  Number one fastest growing crime in the world  Lifelock.com  Fraud Alerts  If it Happens-What to do  How to protect yourself  Top Ten Ways44

Top 10 Ways to Prevent Identity Theft

1) Secure your business premises with locks and alarms Alarm systems are effective deterrents to criminals intent on identity theftEspecially alarm systemsthat are monitored by asecurity company. Best Practices:  Deadbolts on external doors  Windows with security film, bars, screens or shatter proof glass46

2) Put your business records under lock and key Store your physical business records in locking filing cabinets – lock the filing cabinets at night, or when they will not be supervised (lunchtime?). Safe or Safe Deposit Box:  Copies of system backups  Copies of Database backups  Important business data47

3) Shred, Shred, Shred Business records should never be put into the trash or recycling as a bonanza for identity thieves — all business records that you no longer need should be shredded. Businesses that operate out of small and home offices can buy inexpensive shredders at any office supply store Businesses with volumes of material – a shredding service might be best Pay special attention to the mail, a favorite source for identity theft. Anything that has your name and address on it should be shredded, and that includes most bills.48

4) Be cautious on the phone It’s easy for someone to pretend to be someone they’re not on the phone. Don’t give out information over the phone unless you can positively confirm the caller’s identity. Thieves tell authorities over and over how easily they were able to obtain valuable information by calling small businesses or personnel departments. Posing as government agencies, credit grantors or health insurance providers, a well- crafted story can get past the best locking cabinets or protected computers,” warns the Better Business Bureau.49

5) Limit access to your computers Your computer network needs to be password protected, of course, so that anyone who wanders through your office can’t just access your network. Internal network access. Does every employee need to be able to access programs or databases that may contain sensitive information? Password protect these, too, and grant access on a “need-to-know” basis to help cut down identity theft.50

6) Protect your computer from hackers Hacking into company systems and databases appears to have become a favorite identity theft technique – perhaps because in so many cases, it’s so easy.51

6) Protect your computer from hackers Your computer network needs to be protected by firewalls, which helpkeep out intruders by shutting out unauthorized people and letting others go only to the areas they have privileges to use.

7) Be aware the Internet is a dangerous place Ordering something off If you are using Internet Explorer, the ‘Net using a credit make sure that you go to “Internet card is not dangerous, Options” and set the security options as long as you are to a higher setting on each computer; placing your order the default is set to allow just about through a secure site. anything to download. Be careful information you post on your site and how. If you are going to place sensitive information on the ‘Net, (something you should be very cautious about), such as financial data or customer databases, it needs to be password protected and encrypted.53

8) Avoid broadcasting information The cavalier sharing of personal information, which makes identity theft so easy, has to stop. Train your employees to be sensitive to customer information issues, making sure they keep information private when they’re dealing with individuals. Best Practices:  Turn computer screens or use view-blocking covers to prevent stray viewing  Don’t repeat customer information aloud  Don’t leave customer files in the open54

9) Create and enforce a company wide security policy The purpose of your security policy is to educate your employees about issues such as identity theft and data protection. It should include information on:  Email policies (such as what email filters are in place and how to deal with suspicious email)  Computer network access  Internet use policies (such as how to increase browser security settings and safe practices, such as disconnecting from the ‘Net when they’re done using it)  Customer information protection strategies  How to report incidents or violations55

10) Disconnect ex-employees immediately When employees no longer work for your business, you need to be sure that their access to your computer network and company data is cut off immediately.56

A Special Note About PCI (Payment Card Industry) Compliance PCI Compliance is an agreed upon standard developed by the major credit card providers that sets the guidelines for how payment data is to be stored.  If your business handles credit card data – any storage of this data must be done in accordance with PCI Compliance – regardless of the size of your business  This is VERY important – the fines for violations can be substantial  If you have questions about your business’ compliance needs contact your merchant services or terminal provider to request specific details  To learn more about PCI Compliance standards visit: https://www.pcisecuritystandards.org  Their model of data security that should be in place is a good starting point for a data security model for any business wanting to develop a security policy57

Thanks for learning with me today:How to Understand FICO Scoring and Manage Your Credit Profile Continuing Education Credits Offered by: Mark Taylor CDPE, CSSPE, CMPS, REDS Arizona Academy of Real Estate 10207 N. Scottsdale Rd., Scottsdale, AZ 85253 (623)-505-5380 AZRE License #S05-0009

Understanding FICO scores in 2012

by Mark Taylor

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