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Repair credit score for the right type of loan

Wed Jun 13, 2007 12:06AM | By Tony

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When trying to repair credit score, the majority of consumers think of five main components which influence credit scores in the following proportions -

Payment history including late payments, bankruptcies, collections, judgments - 35%
Current debt expressed as the ratio of revolving balances to total available revolving credit - 30%
How long accounts have been open and established - 15%
Type of credit - credit cards vs. installment loans - 10%
Applications for new credit or Inquiries - 10%

That could be one of the biggest misconceptions that potential borrowers have, as these proportions may change from the type of a loan the consumer is looking for. Equifax, TransUnion and Experian use at least three different scoring models for three different types of credit - mortgages, auto loans, and consumer credit, because these different types of loans carry different default risks. These credit scoring models differ in what they mean to predict, the statistical methods used to determine a credit-worthiness score, and what data are used and how they are weighted. Equifax uses Beacon 5.0 for home mortgages, but Pinnacle for auto loans. TransUnion uses FICO Classic 04 and Empirica Auto 95, while Experian uses Isaac/Fair Model II and Advanced Risk Model respectively.

So between two models used by the same credit reporting agency, the credit score can differ by 50-60 points, resulting in quite different rates for a home mortgage and a car loan. Since cars depreciate very quickly and homes tend to, at the very least hold their value, the current debt weighs much more for the auto loans.

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