Understand where FICO

1. How to Understand FICO Scoring and
Manage Your Credit Profile
Continuing Education Credits Offered by:
Mark Taylor CDPE, CSSPE, CMPS, REDS
Arizona Academy of Real Estate
10207 N. Scottsdale Rd., Scottsdale, AZ 85253
(623)-505-5380 AZRE License #S05-0009

2. The Credit Reporting World
The Credit world was not invented for
us. Rather it was put together through
the relationship between the Credit
Reporting Agencies (CRA’s) and the
Creditors themselves
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It’s not Fair 

3. FICO Scoring
Fair, Isaac & Co. (FICO) developed
a unique software which is actually
an algorithm.
The FICO matrix takes into account
important factors and calculates a score
between 300 and 850.
Creditors can now rate your credit
worthiness much easier.
What does this mean?
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4. Credit Clean Up
It means that we can essentially improve our
FICO score by correcting and manipulating
what shows up on our credit
If we understand what factors affect our
FICO score, we can manage it better.
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5. What People Believe
26% Do Not Believe Income
Affects FICO Score
74% Believe Income
Influences FICO Score
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6. What People Think
29% Know the Meaning of
a Credit Score
71% Do Not Understand
Credit Scoring
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7. What People Know
43% Are Aware Insurance
Carriers Consider FICO Scores
53% Unaware Insurers
Consider FICO Scores
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8. Building a Scoring Model
 Large sample of people with similar characteristics are
analyzed
 measurements associated with aspects of creditworthiness
are analyzed
 Each factor of credit worthiness is assigned a ‘weight’ based on
how strong a predictor it is of who would be a good credit risk
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9. Building a Scoring Model
Why was Credit Scoring Developed?
 To take away the human factor when determining a
borrower’s qualifications
 Establish more predictive results from quantitative analysis
 Generate a more reliable system of evaluating credit
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10. What Your Credit Report Discloses
 Personal identification information
 Detailed credit account information
 Payment history
 Account identification
 Chronological history
 Public record information
 Credit report requests
 Consumer statement
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11. What’s In a FICO Score
10% Type of Credit Used
10% New Credit
15% Length of
35% Payment History
Credit History
30% Amounts Owed
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12. What’s NOT in a FICO Score?
 Race, Color, Religion, National Origin, Sex and Marital Status
 Age
 Income
 Savings
 Where you live
 Child/Family support obligations or rental agreements
 Consumer inquiries or promotional inquiries
 Any information NOT found on your Credit Report
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13. Primary Factors That Affect FICO Score
1. Previous Performance
2. Type of Credit
Revolving
Installment
Mortgage
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14. Primary Factors That Affect FICO Score
1. History with Creditors
1. Balance-to-Limit Ratio of Revolving Accounts
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15. Primary Factors That Affect FICO Score
Number of Accounts with Balances The Mix of Accounts
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16. Primary Factors That Affect FICO Score
Pursuit of New Credit Public Records or Collections
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17. The 10 Most Common Reasons for Reduced Credit Scores
1. Serious delinquency
2. Time since delinquency too recent or unknown
3. Amount owed on accounts
4. Public record or collection filed
5. Level of delinquency on accounts
6. Number of accounts with delinquency
7. Proportion of balances to credit limits on revolving accounts
is too high
Source: Credco
8. Length of time accounts have been established
9. Too many accounts with balances
10. Inquiries
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18. Loan Application
FOUR FACTORS:
2. Employment/Income
3. Assets/Down Payment
4. Credit/Debt FICO Score
5. Property
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19. FICO Scoring & Mortgages
How Big of a Role does FICO Play in Lending?
Just since January of 2009, the minimum FICO score
requirement of an FHA loan has escalated
January 560
March 580
May 600
Currently 620*
FHA does not have a minimum FICO score requirement, but
investor overlays installed for the secondary market
*Minimum FICO Score is 580. Scores between 620 and 580 are handled by fewer
investors and are much more difficult to approve
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20. FICO Scoring & Mortgages
How Big of a Role does FICO Play in Lending?
Conventional Loans:
The minimum FICO score required before you
have to start paying a penalty in pricing is:
740
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21. Rapid Rescore
 Available through most local bureaus
 Can take as little as 72 hours
 A very misunderstood concept
 Re-scoring can not change a bad scoring history
 Universal Change Form
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22. Possible Reasons to Re-Score
Erroneous payment
history information
Incorrect account
balances
Accounts discharged
through BK that show as
charge offs
Accounts that show
heavy use of available
credit
Missing accounts
containing on-time
payment histories
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23. What do the letters U, I J & A, etc. represent on my report?
 U: Undesignated. Not designated by creditor
 I: Individual Account
 J: Joint Account
 A: Authorized user of someone else’s account
 C: Co-maker
 S: Shared Joint Account
 B: Co-signor, responsibility only on default
 T: Terminated (closed account)
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24. How Long They Report
Item of Negative Impact Time Reported
10 years from the date of
Bankruptcy:
entry for order of relief
7 yrs. from the date of
Lawsuits and Judgments: entry/satisfaction or
statute exp.
Tax Liens-Paid: 7 years from payment
Tax Liens-Unpaid: No limitation
7 years from the date of
Collections/Charge Offs:
last activity
Criminal Record: No time limit
Other Adverse: 7 years
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25. About Collection Accounts
When a debt is not paid over
time, eventually the creditor will
charge the account off and sell
the debt to a collection agency
for approximately 20 cents on
the dollar.
The collection agency will try to collect the full
amount of the debt from the borrower.
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26. About Collection Accounts
What is important to note here is that the FICO matrix measures only
activity on a collection account and does not differentiate from a
payment or a creation of a new account. Hence, seasoning without
activity is desirable on collection accounts.
Paying a collection account can actually lower
your FICO score substantially.
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27. FICO – The Bottom Line
 FICO Scoring is an important lending tool because it is objective
consistent and predictive
 The formula and factors that go into the scoring model are
considered proprietary
 Scores range between 300-850
 Mortgage lenders use the middle of the three scores
 Minimum FICO score for Mortgage Lending is 620*
*Minimum FICO Score is 580. Scores between 620 and 580 are handled by fewer
investors and are much more difficult to approve
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28. Establishing New Credit
You’ll need to have 3 open and active tradelines:
Obtain Share Secured Credit Cards
Try to keep Revolving Debt to under 50% of
the Credit Limit
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29. How long After? FHA
Bankruptcy
2 years from discharge date
Chapter 7
1 Year of on time payments on the reorganization of
Chapter 13
debt
Foreclosure & Deed in Lieu
Foreclosure
3 years from completion date
Deed in Lieu
Short Sale
All credit perfect for 12 No time restriction, as long as proceeds from
months, including Mortgage short sale serve as payment in full
Any derogatory credit 3 years from completion date
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30. How long After? Conventional
Bankruptcy
4 years from discharge date
Chapter 7
2 years from discharge date/Four years from
Chapter 13
dismissal date
Foreclosure
Foreclosure 7 years from completion date
Short Sale & Deed in Lieu
Short Sale 2 years from completion date with 80% max LTV;
4 years from completion date with 90% max LTV;
Deed in Lieu 7 years with all other LTVs
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31. Ways a short sale could report on your credit report
 Show nothing stating that a short sale occurred Computer network
access
 Show account was settled for less
 Show a running late pay ***
Important to note that even if the credit report does not report the short sale. The
underwriter will notice that there was a recent mortgage on the credit report and
they can ask to see the HUD 1 from the sale
***Will want to draft a protest letter in this case.
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32. Q: So which is worse for my FICO score: Foreclosure or
short sale?
A: It depends…
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33. Free Access to Credit Reports
annualcreditreport.com
or
1-800-322-8228
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34. Step by Step Strategy to Repair your Credit
Determine your credit status: tri-merge credit report with 3 FICO scores
Determine what you want to correct
Draft a letter of protest
State what is wrong,
why it is wrong and
what is correct
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35. Step by Step Strategy to Repair your Credit
Send the letter Certified Mail with return receipt
Measure the 30-day period of time
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36. Step by Step Strategy to Repair your Credit
Watch out for the “Go Away Letter” Follow Up & Re-check FICO’s
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37. Credit Reporting Agencies
Trans Union
800-916-8800 or PO Box 1000
714-738-3800 Chester, PA 19022 $9/each
at 1st prompt #3
www.transunion.com
Experian
888-397-3742
PO Box 9556 Allen,
at 1 prompt #4, 2
st nd $9/each
TX 75013
prompt #1
www.experian.com
Equifax
PO Box 740241
800-685-1111 $9/each
Atlanta, GA 30374
www.equifax.com
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38. Letter of Protest Sample
FORM 1
Date
Credit Bureau
500 Main St.
Anytown, CA 90000
Re: Complaint Letter to Delete Inquiries
Dear Sir/Madam:
I received a copy of my credit report and find the following items to be in error. See the
attached copy of the credit report, with these item numbers written next to the problem
entries. (Describe)
Item 7 This account was timely paid
Item 14 This was not my obligation to pay
By the provisions of Section 611 of the Fair Credit Reporting Act of 1970, I demand that
these inquiries be reinvestigated and deleted from my record. Send me names and
addresses of individuals you contacted so I may follow up.
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39. Letter of Protest Sample (cont.)
I shall assume that 30 days constitutes “reasonable time” for re-verification of these entries
unless you notify me otherwise immediately. It should be understood that failure to re-
verify these items within 30 days constitutes reason to promptly drop the information from
my file according to Section 611(a).
Also, pursuant to Section 611(d) of the Fair Credit Reporting Act, please send me
notification that the items have been deleted. You may send an updated copy of my credit
report to the address below. According to the provisions of Section 612, there should be
no charge for this notification.
Sincerely,
______________________
Signed
______________________
Name (Printed)
______________________
Address
_____________________
City, State, Zip
______________________
39 Social Security Number

40. Commercial Credit Repair
 Credit repair companies use the same tools like the FCRA, the Fair
Debt Collections Act and Acts under the Credit Repair Organizations
Act to legally attempt to improve your credit file
 They must be bonded in order to accept up front monies to
begin work
 Legal Credit Repair companies must give their clients three
documents prior to starting work on their credit file:
1. Credit file rights by State and Federal law
2. Notice of Cancellation (3 day right of rescission)
3. Agreement of services performed, time period and
fee charged, all in bold print
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41. Commercial Credit Repair
How does a Credit Repair company evaluate your file?
 Review your credit on a broad scope to determine your credit’s
overall ‘make up’
 Observe what’s missing, not just what’s wrong with your file
 Determine what steps can be taken IMMEDIATELY to make the
largest impact in the shortest amount of time
 Acting within the law, dispute accounts, based on incorrect
information, improper disclosure or unverifiable data.
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42. Commercial Credit Repair
Is it worth it?
 Has your situation stabilized?
 What do you have to gain?
 Lower mortgage rate
 Lower interest rate on automobile loan
 Lower homeowner/auto insurance programs
 Examine your credit for potential score improvement
 Determine what may or may not improve on your report
 Establish a long-term plan to maintain improved score
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43. Commercial Credit Repair
Is it worth it?
 Typical fees for Credit Repair range between:
 $700-$900 for an individual
 $1,100-$1,500 for joint credit files
 Calculate potential savings as a result of improved credit score
 $100-200/month refinancing your current mortgage?
 $150/month purchasing a new auto
 $500/year on homeowners and automobile insurance
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44. Identity Theft
 Number one fastest growing crime in the world
 Lifelock.com
 Fraud Alerts
 If it Happens-What to do
 How to protect yourself
 Top Ten Ways
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45. Top 10 Ways to Prevent Identity Theft

46. 1) Secure your business premises with locks and alarms
Alarm systems are effective deterrents to criminals intent on identity theft
Especially alarm systems
that are monitored by a
security company.
Best Practices:
 Deadbolts on external
doors
 Windows with security
film, bars, screens or
shatter proof glass
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47. 2) Put your business records under lock and key
Store your physical business records in locking filing cabinets – lock the
filing cabinets at night, or when they will not be supervised (lunchtime?).
Safe or Safe Deposit Box:
 Copies of
system backups
 Copies of
Database backups
 Important
business data
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48. 3) Shred, Shred, Shred
Business records should never be put into the trash or recycling as a
bonanza for identity thieves — all business records that you no
longer need should be shredded.
Businesses that operate out of small and home offices can buy
inexpensive shredders at any office supply store
Businesses with volumes of material – a shredding service might be best
Pay special attention to the mail, a favorite source for identity theft.
Anything that has your name and address on it should be shredded,
and that includes most bills.
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49. 4) Be cautious on the phone
It’s easy for someone to pretend to be someone
they’re not on the phone.
Don’t give out information over the phone unless
you can positively confirm the caller’s identity.
Thieves tell authorities over and over how
easily they were able to obtain valuable
information by calling small businesses or
personnel departments.
Posing as government agencies,
credit grantors or health
insurance providers, a well-
crafted story can get past the
best locking cabinets or protected
computers,” warns the Better
Business Bureau.
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50. 5) Limit access to your computers
Your computer network needs to be password protected, of course,
so that anyone who wanders through your office can’t just access
your network.
Internal network access. Does every employee need to be able to access
programs or databases that may contain sensitive information? Password
protect these, too, and grant access on a “need-to-know” basis to help cut
down identity theft.
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51. 6) Protect your computer from hackers
Hacking into company systems and databases appears to have become
a favorite identity theft technique – perhaps because in so many cases,
it’s so easy.
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52. 6) Protect your computer from hackers
Your computer network needs to be protected by firewalls, which help
keep out intruders by shutting out unauthorized people and letting others
go only to the areas they have privileges to use.

53. 7) Be aware the Internet is a dangerous place
Ordering something off If you are using Internet Explorer,
the ‘Net using a credit make sure that you go to “Internet
card is not dangerous, Options” and set the security options
as long as you are to a higher setting on each computer;
placing your order the default is set to allow just about
through a secure site. anything to download.
Be careful information you post on your site and how. If you are going to place
sensitive information on the ‘Net, (something you should be very cautious about),
such as financial data or customer databases, it needs to be password protected and
encrypted.
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54. 8) Avoid broadcasting information
The cavalier sharing of personal information, which makes
identity theft so easy, has to stop. Train your employees to be
sensitive to customer information issues, making sure they
keep information private when they’re dealing with individuals.
Best Practices:
 Turn computer screens or use view-blocking
covers to prevent stray viewing
 Don’t repeat customer information aloud
 Don’t leave customer files in the open
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55. 9) Create and enforce a company wide security policy
The purpose of your security policy is to educate your
employees about issues such as identity theft and data
protection. It should include information on:
 Email policies (such as what email filters are in place and how to deal with
suspicious email)
 Computer network access
 Internet use policies (such as how to increase browser security settings and safe
practices, such as disconnecting from the ‘Net when they’re done using it)
 Customer information protection strategies
 How to report incidents or violations
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56. 10) Disconnect ex-employees immediately
When employees no longer work for your business, you need
to be sure that their access to your computer network and
company data is cut off immediately.
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57. A Special Note About PCI (Payment Card Industry)
Compliance
PCI Compliance is an agreed upon standard developed by the major credit card
providers that sets the guidelines for how payment data is to be stored.
 If your business handles credit card data – any storage of this data must
be done in accordance with PCI Compliance – regardless of the size of
your business
 This is VERY important – the fines for violations can be substantial
 If you have questions about your business’ compliance needs contact your
merchant services or terminal provider to request specific details
 To learn more about PCI Compliance standards visit:
https://www.pcisecuritystandards.org
 Their model of data security that should be in place is a good starting
point for a data security model for any business wanting to develop a
security policy
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58. Thanks for learning with me today:
How to Understand FICO Scoring and
Manage Your Credit Profile
Continuing Education Credits Offered by:
Mark Taylor CDPE, CSSPE, CMPS, REDS
Arizona Academy of Real Estate
10207 N. Scottsdale Rd., Scottsdale, AZ 85253
(623)-505-5380 AZRE License #S05-0009