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Factor #1 – Payment History

Approximately 35% of a score are based on this category. The first thing any lender would want to know is whether a person has paid credit accounts on time. This is also one of the most important factors in a credit score. However, late payments are not an automatic “score-killer.” An overall good credit picture can outweigh one or two instances of, say, late credit card payments. By the same token, having no late payments in your credit report doesn’t mean you will get a “perfect score”. Some 60-65% of credit reports show no late payments at all.

The score takes into account:

• PAYMENT INFORMATION ON MANY TYPES OF ACCOUNTS. These will include credit cards, retail accounts (ex.: department store credit cards), installment loans, finance company accounts and mortgage loans.
• PUBLIC RECORD EVENTS SUCH AS A BANKRUPTCY, JUDGEMENTS, SUITS, LIENS, WAGE ATTACHMENTS AND COLLECTION ITEMS. These are considered quite serious, although older items will count less than more recent ones.
• DETAILS ON LATE OR MISSED PAYMENTS SPECIFICALLY, HOW LATE THEY WERE, HOW MUCH WAS OWED, HOW RECENTLY THEY OCCURRED AND HOW MANY THERE ARE. A 30-day late payment is not as risky as a 90-day late payment. But how recent and frequency count too. A 30-day late payment made just a month ago will count more than a 90-day late payment from five years ago. Remember that closing an account on which there was a previously missed payment does not make the late payment disappear from the credit report.
• HOW MANY ACCOUNTS SHOW NO LATE PAYMENTS? A good track record on most credit accounts will increase a credit score.

FACTOR #2 – AMOUNTS OWED

Approximately 30% of a score are based on this category. Having credit accounts and owing money on them does not mean that a person is high-risk borrower with a low score. However, owing a great deal of money on many accounts can indicate that a person is overextended and is more likely to make some payments late or not at all. Part of the science of scoring is determining how much credit is too much credit.

The score takes into account:

• THE AMOUNT OWED ON ALL ACCOUNTS. Even if one pays off their credit cards in full every month, the credit report may show a balance on those cards.
• THE AMOUNT OWED ON ALL ACCOUNTS  AND ON DIFFERENT TYPES OF ACCOUNTS. In addition to the overall amount you owe, the score considers the amount owed on specific types of accounts, such as credit cards and installment loans.
• WHETHER A BALANCE SHOWS ON CERTAIN TYPES OF ACCOUNTS In some cases, having a very small balance without missing a payment shows that someone may have managed credit responsibility and may be slightly better than no balance at all. On the other hand, closing unused accounts that show zero balances and are in good standing will not generally raise the score.
• HOW MANY ACCOUNTS HAVE BALANCES A large number can indicate higher risk of over-extension.
• HOW MUCH OF THE TOTAL CREDIT LINE IS BEING USED ON CREDIT CARDS AND OTHER “REVOLVING CREDIT” ACCOUNTS Someone closer to “maxing out” on many credit cards may have trouble making payments in the future
• HOW MUCH OF THE INSTALLMENT LOAN ACCOUNTS ARE STILL OWED, COMPARED WITH THE ORIGINAL LOAN AMOUNTS For example, if you borrowed $10,000 to buy a car and you have paid back $7,000, you owe (with interest) more than 80% of the original loan. Paying down installment loans is a good sign that a person is able and willing to manage and repay debt.

FACTOR #3 – LENGTH OF CREDIT HISTORY

Approximately 15% of a score is based on this category
In general, a longer credit history will increase the score. However, even people with short credit histories may get high scores depending on how the rest of the credit report looks.
Your score takes into account:

• HOW LONG YOUR CREDIT ACCOUNTS HAVE BEEN ESTABLISHED, IN GENERAL. The score considers both the age of your oldest account and an average age of all your accounts.
• HOW LONG SPECIFIC ACCOUNTS HAVE BEEN ESTABLISHED.
• HOW LONG IT HAS BEEN SINCE YOU USED CERTAIN ACCOUNTS.

FACTOR #4 – NEW CREDIT

Approximately 10% of a score are based on this category. People tend to have more credit today and tend to shop for credit (via the internet & other channels) more frequently than ever. Fair Issac scores reflect this fact. However, research shows that opening several credit accounts in a short period of time does represent greater risk – especially for people who do not have a long-established credit history. This also extends to requests for credit, as indicated by “inquiries” to the credit reporting agencies as inquiry is a request by a lender to get a copy of a specific credit report. The Fair Issac scores distinguish between searching for any new credit accounts and rate shopping, which is generally not associated with higher risk. In part, this is handled by treating a grouping of inquiries – which probably represents a search for the best rate on a single loan – as though it was a single inquiry.

Your score takes into account:

• HOW MANY ACCOUNTS ARE THERE. The score looks at how many new accounts there are by type of account. It also may look at how many of the accounts are new accounts.
• HOW LONG HAS IT BEEN SINCE A NEW ACCOUNT WAS OPENED? Again, the score looks at this by type of account.
• HOW MANY RECENT REQUESTS FOR CREDIT HAVE BEEN MADE AS INDICATED BY INQUIRIES? Note that if a person orders their credit report from a credit reporting agency such as to check it for accuracy, which is a good idea – the score does not count this. This is considered a “consumer-initiated inquiry,” not an indication that a person is seeking new credit. Also, the score does not count it when a lender requests a credit report or score in order to make a “pre-approved” credit offer, or to review an existing account with them, even though these inquiries may show up on a credit report.
• LENGTH OF TIME SINCE CREDIT REPORT INQUIRIES WERE MADE BY LENDERS.
• WHETHER SOMEONE HAS A GOOD RECENT CREDIT HISTORY, FOLLOWING PAST PAYMENT PROBLEMS. Re-establishing credit and making payments on time after a period of late payment behavior will help raise a score over time.

FACTOR #5 – TYPES OF CREDIT IN USE

Approximately 10% of a score are based on this category. The score will consider the mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It is not necessary to have one of each, and it is not a good idea to open credit accounts that you don’t intend to use. The credit mix usually won’t be a key factor in determining your score – but it will be more important if the credit report does not have a lot of other information on which to base the score.

Your score takes into account:

• WHAT TYPES OF CREDIT ACCOUNTS SOMEONE HAS, AND HOW MANY OF EACH.

US ING SCORE REA SON CODE S TO UNDERSTAND A SCORE

THE AMOUNT OWED ON ALL ACCOUNTS AND ON DIFFERENT TYPES OF ACCOUNTS. When a lender receives the Fair Issac Credit bureau risk score, up to four “score reason codes” are also delivered. These explain the top reasons why the score was not higher. They say things like”number of accounts with delinquency.” If the lender rejects a request for credit, these reason codes can help the lender tell someone why their score wasn’t higher.

These reason codes are more helpful than the score itself in helping someone determine whether their credit report might contain errors, and how they might improve their score over time. However, if one already has a high score (for example, in the mid-700’s) some of the reason codes may not be very helpful, as they may be marginal factors related to the last three categories above.

INTEREST RATES. They are a significant influence upon our lives in the real estate industry. Low interest rates are a catalyst to our sales; more first-time buyers may emerge, more families may decide to trade up to a house that fits their growing needs. On the other hand, higher interest rates can require some extra effort to drum up more business, as monthly payments can increase to a point where buying a home is no longer affordable for some.

Interest rate movements can seem erratic if taken at face value; they’ll go up one day and down the next. The good news is there is some method to the madness! Interest rates are closely tied to key economic indicators, and it is these indicators that help the Federal Reserve and Secondary Markets establish the market interest rates.

Keeping an attentive eye on the key financial indicators can be to your business advantage. Why? Clients are always asking about interest rates. Being able to talk about rates and the effects of economic pressures builds credibility with your clients. Also, these indicators can help you anticipate future changes in the market interest rates. By foreseeing the possibilities for ups and downs in interest rates, you can adjust your business plans and strategies accordingly.

For instance, if indicators signal that rates could be expected to go down in the future, you may choose to target more first-time buyers prospects, or follow up on some past clients who you think might be in the market to trade up to a bigger, more expensive home. Conversely, an expectation of higher interest rates may signal that you need to zero in on relocation business, or follow up on announcements of employee promotions in the newspaper. Taking the interest rate environment into consideration when developing your marketing efforts can only enhance your plans!

Of course, no one can predict the future when it comes to interest rates. We’d need a crystal ball for that, but following the key economic indicators, you can begin to see the trends and use the market to your advantage. Movements in the economic indicators listed on the reverse are readily available through the news media, financial publications and the internet. The information is out there for the taking; you’ve just got to know what to do with it!

Interest rates are tied closely to the bond market. When bond prices go up, interest rates go down. The following is a list of some of the key economic indicators and how their movements may affect interest rates:

• Consumer Price Index / Producer Price Index (CPI / PPI) – Index is up from previous month. Bond Market moves down. Interest rates move up.
  When prices of goods are up, this is viewed as inflationary; these concerns prompt the Fed to raise rates to curb inflation
• Unemployment – Figures are down from the previous month. Bond Market moves up. Interest rates move down.
  High unemployment indicates lack of economic expansion (anti-inflationary); this is positive for the Bond market and the Fed may allow rates to lower.
• Retail Sales – Figures are down from the previous month. Bond Market moves up. Interest rates move down.
  Lower retail sales are an indication of slowing economic growth; thus the Fed is more accommodating in lowering interest rates.
• Gross National Product (GNP) – Index is down from the previous month. Bond Market moves up. Interest rates move down.
  Lower GNP shows a slowing down in the economy; therefore, the Fed loosens money by allowing rates to come down.
• Housing Starts – New home sales increase from the previous month. Bond Market moves down. Interest rates move up.
  An increase in housing start reflects a growth in economy and with the new housing demand prices and mortgage rates rise. The Fed is less accommodating in allowing interest rates to move lower.
• Federal Reserve is Lowering the Discount Rate – Discount rate decreases. Bond Market moves up. Interest rates move down.
  A decrease in the discount rate (the rate at which member banks can borrow from the Fed) decreases most other rates; that is used by the Fed as a tool for curbing inflation.
• Money Supply Figures – Figures are up from the previous week. Bond Market moves down. Interest rates move up.
  Excessive growth in money will cause inflationary fears; Fed will tighten money growth by allowing short-term interest rates to rise.

As you can see, the financial news can give you a great vehicle for communicating with your clients and predicating the potential movement of interest rates. With a little economic know-how, you can take the interest rates movements in stride with the knowledge that you can see what is coming and adjust your sales efforts accordingly. Information is power. .. use it to your benefit!