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CREDIT EXPLAINED



Understanding Your Credit Score Before Applying

What is a credit score? You should know before applying for a manufactured home loans.


Before deciding on what terms LoanJunction.com will offer you on a loan (which we base on the "risk" to us), We want to know two things about you: your ability to pay back the loan, and your willingness to pay back the loan. For the first, We look at your income-to-debt obligation ratio. For your willingness to pay back the loan, We always consult your credit score, whether your going on a bad credit mobile home loan or not.


The most widely used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score is between 350 (high risk) and 850 (low risk).


Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. In fact, the fact they don't consider demographic factors is why they were invented in the first place. "Profiling" was as dirty a word when FICO scores were invented as it is now. Credit scoring was developed as a way to consider only what was relevant to somebody's willingness to repay a loan.


Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score.


Different portions of your credit history are given different weights. Thirty-five percent of your FICO score is based on your specific payment history. Thirty percent is your current level of indebtedness. Fifteen percent each is the time your open credit has been in use (ten year old accounts are good, six month old ones aren't as good) and types of credit available to you (installment loans such as student loans, car loans, etc. versus revolving and debit accounts like credit cards). Finally, five percent is pursuit of new credit -- credit scores requested.


Your credit report must contain at least one account which has been open for six months or more, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a manufactured home mortgage.


In the United States, a credit score is a number typically between 300 and 850, based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person, which is the likelihood that the person will pay his or her bills. A credit score is primarily based on credit report information, typically from the three major credit bureaus.


In the US, three major credit reporting agencies (often times inaccurately referred to as "credit bureaus"), Equifax, Experian and Trans Union, also calculate their own credit scores. Scores, many with trademarked names, differ by what they are meant to predict, statistical methods used to determine a score, as well as what information is used and how it is weighted. For example, Beacon, Beacon 5.0, Beacon 96, and Pinnacle scores are available only from Equifax; Empirica, Empirica Auto 95, Precision Score, and Precision 03 at Trans Union; and Fair Isaac Risk Score at Experian. While these versions are developed for the agencies by Fair Isaac, they differ and are periodically updated to reflect current consumer repayment behavior. The Next Gen Score is a scoring model designed for consumers. Other consumer scores are published by MyFICO.com and by Community Empower (the CE Score).


In 2006, in an attempt to make scoring more consistent, the three major credit reporting agencies introduced Vantage Score. Vantage Score uses a different range from FICO (from 501 to 990) and also assigns letter grades from A to F to specific ranges of scores. A consumer's Vantage Score may still differ from agency to agency, but the discrepancies would be entirely due to differences in the information reported to the various agencies, not due to differences in scoring models. Since FICO is still widely used by lenders, the agencies continue to offer FICO scores (or their closest equivalent) as well.


Most scores use a multiple-scorecard design. Each version may use individual scorecards, and an individual is typically compared with other consumers. (For example, a borrower with two 30-day late payments will be scored against a population with some similar delinquencies.) The individual is then graded according to which variables indicate a repayment risk in that group.

Nearly all large banks also build and use their own proprietary statistical models for credit scoring purposes, often in conjunction with outside scoring formulas.


Makeup of the credit score

   The approximate makeup of the FICO score Fair Isaac discloses to consumers

Credit scores are designed to measure the risk of default by taking into account various factors in a person's financial history. Although the exact formulas for calculating credit scores are closely guarded secrets, the Fair Isaac Corporation has disclosed the following components and the approximate weighted contribution of each:


35% - punctuality of payment in the past (only includes payments later than 30 days past due)

30% - the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)

15% - length of credit history

10% - types of credit used (installment, revolving, consumer finance)

10% - recent search for credit and/or amount of credit obtained recently

The above percentages provide very limited guidance in understanding a credit score. For example, the 10% of the score allocated to "types of credit used" is undefined, leaving consumers unaware what type of credit mix to pursue. "Length of credit history" is also a murky concept; it consists of multiple factors - two being the oldest account open and the average length of time an account has been open. Although only 35% is attributed to punctuality, if a consumer is substantially late on numerous accounts, his score will fall far more than 35%. Bankruptcies, foreclosures, and judgments affect scores substantially, but are not included in the somewhat simplistic pie chart provided by Fair Isaac.


Current income and employment history do not influence the FICO score, but they are weighed when applying for credit. For instance, an unemployed individual with no other sources of income will not usually be approved for a home mortgage, regardless of his or her FICO score.


There are other special factors which can weigh on the FICO score.


Any monies owed because of a court judgment, tax lien, or similar carry an additional negative penalty, especially when recent.

Having more than a certain number of consumer finance credit accounts also carries a negative weight (critics say that this causes a vicious cycle, locking people into continuing to use consumer finance companies).

The number of recent credit checks also can weigh down the score, although credit agencies usually claim to allow for credit checks made within a certain window of time to not aggregate, so as to allow the consumer to shop around for rates.



Free annual credit reports

As a result of the FACT Act (Fair and Accurate Credit Transactions Act), each legal U.S. resident is entitled to one free copy of his or her credit report from each credit reporting agency once every twelve months. This information is available at the only government-sanctioned credit reporting agency-operated website, annualcreditreport.com, by calling 1-877-322-8228, or by mailing the Annual Credit Report Request Form. To guard against inaccurate information or fraud more often than yearly, one can request a report from a different credit reporting agency each four months. However, the free report does not contain a credit score, though a credit score may be purchased at the time of access. Requesting a credit report will subject you to "pre-screened" offers of credit cards. To prevent all three credit bureaus from making your address available to credit card companies for this purpose, you may opt out by calling 1-888-5-OPT-OUT (1-888-567-8688).

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