The Credit Check Process
You need more money. You receive an alternative loan application.
You are told, “call the lender or apply on-line to see if you’re approved.”
- But what actually happens?
- Any pursuit of credit – home loan, auto loan, private education loan,
etc. – authorizes a lender to obtain a credit score. A lender uses this
score to help answer the question, “What is the likelihood that this
borrower will pay us back on time?”
- A FICO score is the most commonly used credit rating.
The higher the score, the lower the risk.
- FICO
is the acronym of Fair Isaac & Company, developers of
the software used by lenders when performing a credit check
- Scores are based solely on information in consumer credit
reports maintained at the credit reporting agencies
(Experian, TransUnion & Equifax)
- Credit scoring is a quick, objective & consistent method for
lenders to measure the “risk” of an applicant
- Your FICO score is a constant work-in-progress.
The FICO score is an equation that evaluates:
- payment history (35% of score)
- amount you owe (30% of score)
- length of your credit history (15% of score)
- pursuit of new credit (inquiries) (10% of score)
- types of credit you use (10% of score)
For particular groups – for example, those who have not been
using credit for long – the importance of these categories may vary.
- FICO scores range from 300 - 850
- Scores may vary slightly between the credit bureaus
(due to variations in the way creditors report information)
- Lenders decide from which credit bureau to pull scores
- FICO scores only reflect the info that appears on a credit report
- It's important to remember that lenders may also ask applicants
to provide info such as income, length of present employment and types
of credit the applicant has pursued. Generally, a high enough FICO will
serve as a “pre-approval” until these other financial documents are provided.
- Up to four “score codes” are provided to a lender when a FICO score is pulled.
These codes are the top reasons why the score was not higher.
- Codes help a lender explain to a borrower why credit was denied.
- Additionally, these codes may be more useful for the applicant than the
FICO score itself. Codes may illustrate potential errors in a credit report
as well as providing tips on how to improve one’s credit health.
- The top reason codes:
- Serious delinquency
- Serious delinquency, and public record or collection filed
- Derogatory public record or collection filed
- Time since delinquency is too recent or unknown
- Length of time accounts have been established
- Level of delinquency on accounts
- Number of accounts with delinquency
- Amount owed on accounts
- Proportion of balances to credit limits on revolving accounts
is too high
- Too many accounts with balances
- Why do so many students need co-borrowers?
- Many have little to no credit history
- Many cannot meet additional application factors such as income
history and debt-to-income ratio
- Most will benefit from the FICO score of an established
borrower with good credit
*
Does 'rate shopping' affect a credit score?
Your single application will be sent to multiple lenders who will
all pull a credit report for you and your co-borrower for the purpose
of determining your credit worthiness. This may or may not have a
minimal adverse affect on your credit score.
Currently, the credit scoring criteria done by
FICO allows multiple
credit pulls for mortgage and car loans to be viewed as one single
credit pull, having no affect on a credit score. It is called ‘rate shopping’.
Our business model is the same and so we, along with other companies
in the industry, are working towards FICO viewing education loans
in the same manner. We encourage you to politely give FICO your opinion as well.