FICO – it’s a new credit system and it’s not fun!
Once upon a time, or until about four years ago, we obtained loans and credit based on how we paid – or didn’t – our debts and financial obligations…
Then along came FICO Scores and suddenly someone with a stellar history of paying bills may be rated lower than someone who has declared bankruptcy!
Sure, a mortgage loan underwriter still looks at your credit report, but mostly to verify what you’ve disclosed on your loan application and to prepare your “loan package”… The real determining factor affecting the loan terms, loan fees, interest rates – and sometimes whether our application is even reviewed – is our FICO score!
We will always be gathering and reporting information about FICO scores, how they affect you, and how YOU can affect them! If you’re a subscriber to “My Building News”, (you should be – it’s FREE and it’s valuable!), look for an early release of these articles and resources!
A brief but valuable overview of FICO scores follows:
What IS a FICO score and who rates it?
FICO stands for Fair Isaac & Company, the company responsible for the software, and credit scores are reported by each of the three major credit bureaus: TRW (Experian), Equifax, and Trans-Union. The score on each bureau report is seldom the same, because each bureau has different evaluation and targeting criteria. FICO scores range from 365 to 840.
What is the FICO Score supposed to provide to the lender?
The FICO score is derived from a special software program that grinds out a “PREDICTOR” score which theoretically evaluates how the consumer is likely to handle (or not) their debt obligations. Basically, the algorithms come from mountains of data about consumers’ spending and payment practices, income and debts, demographic info, public records and the like.
Following is a short table that outlines the odds of debt delinquencies related to a FICO score:
| FICO Score | Odds of a Consumer having a 90 day delinquent account |
|---|---|
| 585 | 2.25 to 1 |
| 600 | 4.5 to 1 |
| 615 | 9 to 1 |
| 630 | 18 to 1 |
| 645 | 36 to 1 |
| 660 | 72 to 1 |
| 680 | 144 to 1 |
| 700 | 288 to 1 |
| 780 | 576 to 1 |
FICO Scores and Interest Rates
The FICO credit scoring system affects loan approval, interest rates, loan fees, loan terms it’s a BIG factor with a wide impact on your financial health!
An example of the bottom line of a FICO score on loan fees is a mortgage lender who drops the cost of a loan by a quarter point for a FICO score higher than 725 Each point is equal to one percent of the loan amount; for a loan of $200,000, the savings on loan fees would be $500. Add the other variables, both short term effects such as loan fees and long term costs of even a half percent interest rate difference, and you’ve got a dramatic financial impact!
Each lender looks at the FICO scores a little differently. Basic policy guidelines usually mean that a FICO score over 680 has few problems, while 640 to 680 get closer scrutiny and scores below 640 will have a tough time. Some lenders refuse to even review a loan package with a FICO score below 620.
- Too many recent credit inquiries (these might have resulted in debt that has not had an opportunity to show up on your credit report)
- Too many revolving charge accounts or cards
- Too few revolving charge accounts or cards
- Balances on accounts are too high (excessive dependence on credit)
- Not enough balances on credit accounts…
- Too many recent credit cards or charge accounts
- Not enough credit cards or charge accounts, or credit history is too short
- Consistent or excessive delinquencies on payments
- Bankruptcies, Judgments, Tax Liens (Public Records)
Coming in February and March 2011, a series of articles on what YOU can do to control YOUR FICO score!
Check out these resources to learn more about FICO scores:
Consumers Union great article on the history of FICO and legislative actions regarding Consumer’s Rights…
Coming Soon! Can you REALLY clean up your credit? We’ll give you the best information and solid resources – you be the judge!
Coming Soon! Building good credit… tips and resources that will really help!
Coming Soon! Alternative home financing and resources…