Understanding the Vast Business of Scoring

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Today’s post brought to you by North Shore Advisory. Contact information provided at end of post.

At present and in the long term, future scores and credit reports will continue to play a huge part of approvals for financing and the rate paid, as well as leases, real estate purchases, credit card interest rates, insurance, financial tool offers, and so much more. We are even seeing scores that predict our likelihood to purchase goods and services online and whether we will be worth a company reps time on the phone as a potential customer. Scoring thresholds for approvals and better rate offers on loans have become higher while lenders of all kinds depend on scores to evaluate and curb risk making it essential for all of us to understand who creates these scores, where they are offered, and what the variations are.

Most consumers (and even some professionals) when asked, “What score did you pull?” answer “The credit score…you know….Experian and the other bureaus?” Many assume they are all the same or if the scores come from the bureaus those are the ones everyone uses. It is always important to note that there are many scores and each may have a different range. For example, if you pull a Fico score the range is 300-850 and anything above a 740 is excellent. If you pull a Vantage score the range is 501-990 and it has letter grades A-F. If your Vantage Score is a 740 it does not mean you have excellent credit. This is just one comparison of two scores.

Most consumers think all scores come from the bureaus which is also false. Fico created the first scores for lenders to evaluate risk. When banks found themselves getting sued for discrimination due to underwriters (bank employees) being the sole authority for rejecting applicants, the demand for a score to use as an indicator of risk became prevalent. This was a way for the focus to come off the banks when consumers were rejected. Fico is and always has been a separate company from Experian, Trans Union, and Equifax. The Fico scores used by lenders are scores created by Fico for the purpose of each bureau to sell to lenders. The bureaus use their Fico version score formula for lenders to evaluate the information the bureau compiled on a specific consumer in the form of a number. The lenders pay a fee to the bureau for this service. Equifax and the other bureaus pay Fico a royalty when using the Fico formula created for them. Equifax, Experian, and Trans Union did not create any Fico scores and they are not Fico.

There are many models of the Fico Scores made specifically for Experian, Trans Union, and Equifax and each bureau has separate names for their versions:

Equifax has Beacon 09, 05, & 96 or you might see these same versions displayed on the report as Beacon 5.0 and 9.0 as well. There is also Pinnacle 1.0 & 2.0 which is Equifax Fico next generation.

Trans Union Fico scores are called Fico Risk Score Classic 08, 98, or 04. There is also Fico risk score Next Gen. The old name of the Trans Union Fico score was Empirica.

Experian has the Fico Risk Model 08, V2, V3 and Fico Advanced Risk Score 1.0 & 2.0. Experian use to call its score Fair Isaac Risk Score.

Although some of these scores are outdated they may still be used by banks. You can find the name of the model used to the left, right, or above of the score itself on a merged credit report.

Besides Fico scores, there are hundreds of other scores created by each bureau and sold for many purposes to lenders, insurance companies, credit card companies, landlords, finance companies, telecommunication companies, and much more. There are scores that decipher which consumers might be more likely to default on a mortgage already extended, scores that give insight into which consumers should be offered lower interest plus higher limit credit cards. Some scores even predict those who are more likely to go into strategic default on a mortgage loan. There are even global scores used by large corporations doing business internationally.

Just to give you a glimpse into varied scores here is a list of just a small portion of scores that one of the bureaus offers for sale:

In the Market Models

  • Income Insight
  • TAPS
  • National Risk Model-National Equivalency Score
  • Decision Insight
  • Credit Migration Solutions
  • Collect Score
  • Auto Risk Model
  • Bankruptcy Watch
  • Retail Risk Score

These are 10 of 100’s of scores offered by bureaus to corporations as a tool to help identify consumers and existing customers that will bring more profits as well as those that will deliver potential loss.

When we think of credit scores we think of consumer scores used to evaluate risk for mortgages and those that we as consumers buy online. But understanding the vast business of scoring can help us with the big picture. Since we are all being evaluated and watched through these algorithms it helps to get a clearer view of how they work within the corporations that use them.

Feel free to call us with any questions or feedback on credit challenged clients or credit in general!

Making sure credit is analyzed with future financial goals in mind is a MUST before taking an action that can foil those plans and limit a consumers options for a better quality financial life.

“Great credit brings great opportunity!!” Copyright 2012

North Shore Advisory, Inc. offers credit repair, restoration, and education services. We’ve been providing credit education and credit improvement for more than 20 years. For bankers and realtors we can review your clients’ credit reports and scores to see if we can improve them.

We can help you with your business credit needs or personal FICO scores.

Contact Us:

Expand Financing Options With Balloon Mortgage Loans

Houses Bought As-Is for ALL CASH! Fast Closings!

If you aren’t familiar with mortgage financing options, it is never too late to get started. Understanding the different terms and having the ability to relate them to each other and to your personal situation will help you avoid situations that are not financially viable. One of the terms that you should know is balloon mortgage loans.

This can either help you financially, or cause you problems. Understanding the details of how a balloon mortgage loan works and using it to your advantage will enhance your ability to select the right loan for your purposes. The original description of a “balloon” mortgage loan is a loan on which repayment is made in monthly payments of “interest only” and exclude any principal reduction feature.

Payment was made to principal in one lump sum at the end of a specified term, meaning that if you took out a 10 year balloon mortgage loan for $100,000 at 5 percent, your monthly interest payments would probably be calculated at $417 per month (rounded to the nearest dollar), and you would have to come up with $100,000 in one lump sum on the due date in 10 years. Folks who opt for balloon mortgage loans do so in order to take advantage of the lower monthly payments.

If you are exposed to balloon loans over a period of time, you’ll find that “Some balloon loans, such as a five-year balloon mortgages, have a reset option at the end of the five-year term that allows for a resetting of the interest rate (based on current interest rates) and a recalculation of the amortization schedule based on a remaining term. If a balloon loan does not have a reset option, or frequently even when it does, it is expected that the borrower will sell the property or refinance the loan before the end of the original loan term.” This according to Investopedia on the Web.

There have been a number of creative changes to the balloon mortgage loan over the years, and during the subprime mortgage era some lenders offered balloon mortgage loans with a feature which consolidated a specific percentage of the loan each month. At the end of your agreed-upon term, you were required to pay the additional percentage that is left. In many cases, this equalled about fifty percent of the loan that you had taken out.

You can work with balloon mortgage loans to your advantage if you have the right finances in place. For example, if you know that you will have a large sum of money at a given time or date in the future, borrowing money under the terms of a balloon mortgage loan would make sense as long as you arrange the end of your loan term to coincide with the date you will receive the large sum of money. It is circumstances like these when having a balloon mortgage loan can help you to save now and build your credibility with financial investments later.

If you aren’t certain of your financial picture and what it will look like in ten years, then a balloon mortgage loan will most likely not be right you. Because since you will be expecting to pay a large (lump sum) amount at the end, it can lead into debt – or foreclosure if you don’t have the money – and therefore won’t help you to make an investment on another house in the future.

On the other hand, if your income is a specific amount now but you know that it will increase later, then you can use a balloon mortgage loan in order to stabilize your financial conditions by refinancing into a higher payment amortized loan.

By using an exotic balloon mortgage loan (if you can still find a lender that offers such a loan), you will be put into a situation where your mortgage will blow up to twice as much at the end of the term. This can be an advantage or a disadvantage, depending on your situation. By knowing exactly how to tie the end of your balloon mortgage loan into your expectant good fortune, you will be a good position to find the best financial options for your situation.