It's a Credit "Inquiry" - NOT "Inquisition"

By John L. Fischer, Personal Finance Writer   

Back in 1993, when I was a mortgage broker and dinosaurs roamed the planet, the process of judging a credit history report was completely different than it is now. Credit scoring was around, but mortgage underwriters didn't use scoring models when evaluating your credit history and credit rating. They actually did a manual credit history check (meaning they picked up your report and read it) to look for bad credit and determine your credit rating. These days, you're judged strictly on a computer-generated score. I used to be pretty fast in evaluating a client's credit history, but I can't compete with a computer.

What's not different between those caveman days and now is how important your credit history is. A good credit rating can save you thousands of dollars in interest fees; it can even give you an edge when applying for a job or insurance. I still tell people that a good credit history is one of the most important assets they possess.

In the manual grading system, all loan applicants were ranked in one of the following categories: "A," "B," "C," and "D."

• An "A" credit rating was generally reserved for credit history reports with no late payments and lots of credit history. A customer could also have a bankruptcy on his or her credit report, as long as it was three years old and there was no bad credit since the bankruptcy.
• A "B" credit history included some dings, such as a 30-day late on a mortgage or some 30-day lates and maybe two 60-day lates on revolving accounts (credit cards) or maybe a collection account. The amount of available credit used was also scrutinized — if the client was "maxed out," they might be bumped down a grade.
• A "C" credit history had one or two 60-day lates on a mortgage, some 60s and one 90 on revolving lines of credit. If the customer had judgments, collections or multiple late pays after a bankruptcy, they would most likely be a "C" credit loan.
• A "D" credit rating — well, you can just imagine.

So why have I bothered to go through the old-fashioned method of doing a credit history check? Many people are confused when someone tells them what their score is and its meaning when they perform a credit history check. This little chart may be able to help you understand the system. The credit rating game has changed with the introduction of automatic credit scoring, but I can approximate the above grades to actual scores generated by most scoring systems:*

*Note: No one outside of the scoring model companies knows the exact formula for calculating your score, so these are approximations only. You should also know that every financial institution uses a method of calculating credit scores customized to its own business practices. No two models are the same.

The original credit scoring model was developed by Fair Isaac, but there are several main models in use today. These scoring models take into account other factors besides payment history, such as the amount of credit line used, the number of times you've applied for credit, and the age of the credit accounts. The biggest factor, though, is still payment history, and you can look at your credit history report and the above chart to approximate your credit rating fairly accurately, even if you don't know what your score is.

You may ask, "Does anyone ever look at my credit history report?" The answer is yes. If you're applying for an FHA loan, an underwriter still does a manual credit history, but you still need an acceptable credit score. Also, if your credit rating is hovering between a "B" and "A" loan when doing conventional financing, your overall report may be manually checked to bump you up a grade.

The bottom line: If you're shopping for loans of any kind, getting a bank account, or applying for a job, bad credit (usually caused by not making payments on time) is still going to sink your ship, no matter what technology is used.