Credit scores can kill - or speed - the sale.

Credit scoring - it can mean the death of the sale, or it could mean the mortgage will go through faster.

Is credit bureau scoring just another name for a credit report? The answer is no, it's a lot more than a simple report. It's an analysis of the information in the credit report that predicts how likely the loan applicant is to pay back the loan. Scoring is an automated rating process designed to speed up the lender's decision, reduce his costs, and maintain consistency. Some advocates also point out that scores eliminate the "human" subjective element in making a decision.

Scores predict lender's risk

Fair, Isaac (FICO) Credit Bureau Scores are available through the three national credit data repositories: Equifax, Trans Union, and Experian (formerly TRW). The scores are based on the information in an individual's credit report and figured by a method developed by Fair, Isaac Co. several decades ago. The process has been used for years for consumer and auto loans and by credit card companies, but only in the more recent past has the system been utilized by mortgage lenders. Secondary market investors Fannie Mae and Freddie Mac began strongly recommending last year to the lenders who expect to resell mortgages that they use FICO scores.

For the formulae used to arrive at a score, Fair, Isaac data applied complex mathematical methods to analyze data they collected on millions of consumers. They've been able to see patterns that are reliable predictors of the likelihood that a borrower will pay back the loan. Another method of scoring, CreditQuote, is a mortgage-specific score derived from credit data that has gone through an automated merged process. Also developed by Fair, Isaac, CreditQuote is available through some mortgage credit reporting agencies.

What's scored?

Some of the characteristics that help reveal risk to a lender are:
-- payment history, including severity and frequency of delinquencies and how recently they occurred
-- inquiries and new account openings (inquiries count against one's score, but Fair, Isaac says they shouldn't be a big factor)
-- outstanding debt
-- credit history
-- types of credit in use.

Information not included in the credit file is not considered in the credit score. Race, color, religion, national origin, sex, marital status, age, occupation, and length of time in the present house are not considered predictive characteristics. If a mistake has been made in the report and is eventually corrected, the original score is not corrected automatically when the report is changed.

FICO scores range from 450 to 850 points, and the higher the score the less risk to the lender. For instance, the ratio of good loans to bad ones for scores below 600 is 8 to 1; for scores between 700 and 719, the ratio is 123 to 1; and for scores above 800, the ratio of good to bad loans is 1,292 to 1. Fannie Mae found that 10 percent of the borrowers in loans it had purchased had scores below 620, but that group accounted for half of all defaults. CreditQuote scores have a different scale than the more widely used FICO scores.

Lenders don't have to reveal scores

The Fair Credit Reporting Act entitles consumers to see their credit reports and the Equal Credit Opportunity Act ensures the right to learn what in the reports led to denial of credit. However, the Federal Trade Commission concluded in September 1995 that lenders don't have to disclose the actual risk scores, since they aren't part of the credit report, merely an analysis of the information in the report. That decision was a reversal of the previous interpretation. Arguments for the new decision included the costs of supplying and explaining the scores and the likelihood that more consumers would be confused by the scores than would benefit from seeing them.

For borrowers with sterling credit histories, credit scores can be a blessing. For example, if a borrower has a high score, a loan at a low rate of interest may be granted within a few days. If the applicant has a slightly lower score, supplemental documentation may be required, the time to process the loan may take longer, and the rate may be higher. If a score is low, the applicant will probably have to look longer for a mortgage and terms won't be as satisfactory.

Can scores be improved?

Can one's scores improve? Only the credit bureau that generated the report can correct disputed items, but changing one specific derogatory item will not guarantee an increase in the credit score. The same is true for a low score that accurately reflects the applicant's history. Even if a loan or two were paid off, there's no guarantee the score would be higher. In some cases, Fair, Isaac says, such action could even result in a lower score. Scoring does not calculate a debt ratio - that's still considered by the lender independent of the score: scoring simply reflects the applicant's payment patterns as well as payment history. Fair, Isaac recommends paying credit obligations on time, using credit wisely, and letting time heal the problems.

For more information, search the Internet for "credit scoring" and "FICO".

Advice to buyers  - how to avoid damaging their credit score

Fair, Isaac says inquiries shouldn't be a big factor in a person's credit score, but at least one man who wanted a mortgage would probably disagree. Robert Madden, Sr., President of Sun National Mortgage Company on west Bell Road in Phoenix, said one of his loan applicants had a score of 680, which is considered a good score. The man decided to look for a new car during the time his mortgage was being processed. He went to six dealerships, and his credit was checked a total of nine times, although he told the lender he hadn't given permission to have his report checked at all. His score had dropped drastically when it was checked again by the mortgage company.

"Each time your credit is pulled, your score goes down nine points," Madden said.

Paul Davis, Senior Loan Officer at the central Phoenix office of Inland Mortgage on Bethany Home, agrees that mortgage hopefuls should avoid even the appearance that they're thinking of applying for credit during the time their mortgage is being considered. "If there's a tremendous number of inquiries, it's going to affect the score," he said, "and lenders, in general, are going to depend on those scores.

"We counsel people who ask for a mortgage," he added. "I have a brochure I give out, and I warn them, 'Don't commingle your money with Aunt Susie's, because we won't be able to tell what's yours and what's hers. Don't move your bank account. And don't buy anything right now.'"

"Those scores are so important," Madden said. "All credit other than FHA is now FICO driven." Sun National conducts credit repair seminars where people can learn how to clean up and maintain their credit ratings. "Maintaining your credit is just as important as fixing it," Madden said.

The message to home seekers and buyers is that they need to preserve the credit rating they have by forgoing or delaying any new credit transactions and not letting anyone else check their credit while the loan is in process.