BY TRACY BECKER
Know the score on credit scores
AccountAnts who understAnd how credit scores
work and what they mean can help consumers and businesses qualify for hard-to-get loans and credit, save hundreds,
thousands and, in some cases, millions of dollars in interest
rates and closing costs, and, in the case of businesses, remain
attractive to potential customers.
There are many different scores used for various reasons.
some are for educational purposes and are sold directly to
consumers. others are indices used by mortgage lenders or
insurers, including government agencies, such as Fannie Mae,
Freddie Mac and the Federal housing Administration, to determine a borrower’s creditworthiness.
to arrive at a score that represents each applicant, various factors are taken into account, such as an individual’s or
business’ bill-paying habits, open credit accounts, age of the
accounts, activity on the accounts, variety of credit, amount of
debt-to-limit ratio, and delinquency records. even the number
of credit inquiries over a period of time can affect a score.
consumers can find their scores by going online. The most
common consumer scores found online are those from Fair
Isaac corp. (FIco), whose scores range from 300 to 850; Plus,
whose scores range from 300 to 830; equifax, whose scores
range from 280 to 850; and Vantage, whose scores range from
501 to 990 with letter grades from A to F.
For consumer loans and mortgages, most banks use FIco
as the provider of credit scores. This is important because
other credit score providers, such as Plus, Vantage and equifax, can be 40 to 150 points higher than FIco. Borrowers who
rely on score providers other than FIco can be grossly misled
as to their loan qualifications and their ultimate loan costs.
A 720 FIco is considered a good score for a mortgage, and a
740 and above is excellent. Below a 620 is poor. to buy a FIco
score, consumers can log onto www.myfico.com.
FACTORS AFFECTING CONSUMER CREDIT
here are some of the factors that can affect a credit score:
Balances over 10 percent of revolving credit limits de-
crease credit scores. revolving credit is defined as any account
where consumers can make the minimum payment, or pay
more and choose what amount of the credit line they will use.
If the balance is over 10 percent of the limit, the score will
begin to drop. The closer the balance is to the limit, the more
the score will drop. If the balance is over the limit even by $1,
the score can drop over 100 points.
A credit score is affected less by negative information as
Tracy Becker is president and founder of North Shore Advisory Inc., a New York-based credit restoration and education company that works with CPAs, bankers, realtors and
attorneys. Reach her at email@example.com.
the information ages. Most negative information will remain
on a credit report for seven years, and bankruptcies remain
for 10 years. Making an account current will not take away the
negative impact of any late payments or delinquency.
when a third party reviews a consumer’s credit profile
(called a “pull” or inquiry), the score can drop up to five points
for each inquiry. however, mortgages, student loans, car loans
and leases have a window of time where third-party inquiries
will be grouped in batches and viewed as one.
during this period the score will drop only five points for
each type of loan as if only one inquiry were made. such windows usually last for 14 to 30 days. For example, a consumer
shopping for a mortgage, student loan and car loan at the
same time might have their credit pulled 10 times within each
of the three categories. As long as the “pulls” take place during
one window of time, the score will decrease only up to five
points for each category of loan.
Inquiries by third parties for credit other than for mortgages, student loans or car loans will reduce a score up to five
points each time, as there is no window for such inquiries.
(when consumers pull their own credit reports and credit
scores, the inquiry will not affect the score.)
As with consumers, credit scores play a big part in determining business credit. The right business credit score is of great
value when negotiating lower lease payments, approval for
business loans, or when a potential client is deciding which
company to use for business-to-business services.
The sad fact is that one late payment or a collection account for a specific amount related to the debt owed for each
vendor listed on the individual’s report can drop a score such
as Paydex by 40 points or more. This will immediately place a
business into the high-risk category.
dun & Bradstreet is the best-known provider of business
credit scores and ratings. Businesses with poor d&B scores
can have loans denied or credit extensions cut or closed. They
can be rejected for bids and services by prospective customers, or have their products removed by stores like wal-Mart.
The d&B rating can quickly help assess a firm’s size and composite credit appraisal, based on information in a company’s
interim or fiscal balance sheet and an overall evaluation of a
these days it is common for lenders and companies to
check d&B reports when making decisions on credit and
services. having the wrong vendors listed on a d&B report,
or too much or too little information given, or a new late payment at the wrong time, could mean the difference between
approval and rejection of a much-needed credit line or request for services or products by potential clients.
d&B’s Paydex score is based on payment patterns and is
dollar-weighted by the creditor and vendor accounts listed
on a business’s report. scores range between one and 100. An
80 signifies a high score and indicates all bills are being paid
promptly. A low 60 score means late payments, judgments
or collections. Below a 60 could mean many defaults or very
little credit history.
d&B’s Financial stress score was designed to help predict
a business’ potential for failure. It indicates the likelihood
that a company will obtain legal relief from creditors or cease
operations without paying all creditors in full over the next
year. The score uses the full range of d&B information, includ-
ing financials, comparative financial ratios, payment trends,
public filings, demographic data and more.
d&B’s commercial credit scoring system model is based
upon the observed characteristics of hundreds of thousands
of businesses in d&B’s database and the relationship of these
characteristics to the probability of a company experiencing
severe delinquency over a period of 12 months.
The amount of information processed into consumer and
business credit scores is large and complex. while accountants cannot be expected to master all of the intricacies of the
system, they should have sufficient knowledge to be able to
advise clients and know where and when to seek expert help
from credit score experts and firms that specialize in the restoration and monitoring of credit scores and credit. At
“I’m flattered, but I don’t have to pay taxes as a frog.”
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