Rate shoppers to get a better break on credit score Reducing the penalty for checking around

Nation's Housing

January 25, 1998|By Kenneth R. Harney

YOUR CREDIT score -- the three-digit number that frequently determines whether and at what interest rate you qualify for a home mortgage -- is about to become more consumer friendly. The company whose statistical scoring models are most widely used in evaluating mortgage applicants is changing the way it factors in credit-check "inquiries" to compute credit scores.

The net result of the changes by San Rafael, Calif.-based Fair, Isaac and Co. Inc. should be to minimize the negative effects that aggressive rate-shopping can have on mortgage applicants' credit scores. These "FICO" scores are now used by most major lenders to gauge the risk of default by prospective borrowers. A low FICO score can trigger rejection of an application or a higher interest rate. A high FICO score means lower risk to the lender, and can mean a lower rate.

FICO credit scores are generated from proprietary statistical models located at each of the three major credit "repositories" -- Equifax, Trans Union and Experian. (formerly called TRW.) The repositories receive information on the credit behavior of millions of Americans from banks, credit card companies, mortgage lenders, merchants and the like, and they store and update it electronically.

Fair, Isaac's statistical models attempt to predict risk by focusing on borrowers' repayment patterns, the length of borrowers' credit histories, the amount of credit that borrowers have access to and are using, and whether borrowers are seeking additional credit. The repositories learn that consumers are seeking more credit because they maintain records of every request -- or "inquiry" -- to see an individual's credit file.

Inquiries work like this: Say you're interested in buying a new car, and you visit a half-dozen dealerships to find the best buy on a new car. At each dealership, sales personnel obtain your name and address, possibly your Social Security number. While you're sitting in the showroom or doing a test drive, the dealership may run a quick credit check on you, and to see if you're really qualified to handle the purchase. Every such check ends up as an inquiry on your electronic file.

Though Fair, Isaac and Co. has never revealed technical details about how its statistical models work, it confirms that inquiries do count as a "risk factor." In general, the more inquiries, the greater the probability that you're seeking to increase your access to more credit, and possibly increase your total indebtedness. That, in turn, can depress your FICO score.

The impact of multiple inquiries on credit scores has generated controversy. Some mortgage applicants claim that their scores were unfairly lowered by credit-check inquiries they never knew about, or that they simply represented intensive shopping for tTC car, furniture or a mortgage.

One Chicago homeowner, Eric Pawlowski, complained publicly in October that just two recent inquiries on his credit report knocked more than 50 points off his FICO score, and caused a lender to raise his equity-loan rate quote from 10 percent to 16.5 percent.

A Fair, Isaac spokeswoman denied that two inquiries could depress a FICO score that dramatically, but declined to specify what the likely point decrease per inquiry might be.

FICO scores range from a high above 800 to 400 or below. The biggest sources of mortgage money, Freddie Mac and Fannie Mae, generally view scores of 620 and above as acceptable risks.

With loan officers assigning increasing importance to strict score cutoff levels, any factor that depresses your score may be significant, even if it's just 10 or 20 points. And, multiple credit inquiries on your file may signify nothing more than that you're doing some heavy-duty rate shopping.

Fair, Isaac previously has dealt with the "shopping" inquiries issue by lumping together all inquiries from similar categories of creditors within a seven-day period and counting them as a single inquiry.

But seven days can be very short for serious shoppers, especially in a declining-rate environment. So, Fair, Isaac has decided to adopt a new, more generous standard: Starting in the next few weeks, mortgage hunters will get a new 14-day shopping period, during which all home-lender inquiries will count as one.

And, better yet, there will be a new "buffer" period that ignores all mortgage- and auto-related inquiries within the 30 days prior to the time of scoring.

The bottom line here: Refinancers and new mortgage applicants no longer will be penalized at the credit window simply because they shopped hard for longer than a week.

Pub Date: 1/25/98

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