It is one thing to know what
credit scoring is, and yet another
to know what it can do for you.
Or, maybe, do to you.
According to
FairIsaac Corporation (FICO), the company that leads
in the provision of credit scoring software, credit scoring offers consumers
many advantages. Remember, these are their words, not ours.
Credit scoring enables faster lending decisions
Mortgage originators now can even make house calls carrying laptops equipped
with software that allows them to pre-qualify or pre-approve borrowers in minutes.
Credit scores are a big part of a lender's ability to make these quick
credit decisions. This same technology is in play on those quick decision Internet
web sites.
Credit scoring encourages fairer decisions.
Credit scores do not take into account gender, race, religion, marital status,
or national origin, and, hopefully, screen out any subjective feelings based
on these or other personal factors.
Credit mistake are less important.
Credit scoring mitigates the impact of old credit problems. According to FICO,
scoring weighs all credit related information, good and bad, in constructing
a score and allows persons with previous credit problems to put that history
more quickly behind them.
(An editorial interjection, if you please. FICO's own information would
indicate that a good history evaporates a lot more quickly than does a bad one,
no matter how short lived. Most bad credit stays on record for at least seven
years, a bankruptcy for ten. Anecdotal information indicates that nobody looks
at the history that predates a credit disaster. If you have a tale to tell,
please contact us.)
Credit scoring makes more credit available.
Lenders who use credit scoring are likely to approve more loans. They can identify
borrowers who, even with past problems, may perform well in the future. 'The
use of credit scores gives lenders confidence to offer credit to more people
since they have a better understanding of the risk they are taking on.'
(FairIssac's web site.)
Scoring makes rates lower overall.
Automated credit programs make lending decisions more cost efficient and savings
are passed on to consumers. Therefore, mortgage rates are lower (for example)
in the U.S. than in Europe.
Rates!
That brings us to the topic of what credit scoring can do both for you and
to you.
FICO, on its website, www.myfico.com, provides a table, updated daily, of mortgage
rates that one might expect based on a FICO score. This table gives a pretty
good example of the rate spread that might be anticipated, not only when applying
for a mortgage, but also a car loan or a new credit card.
On February 17, FICO gave the following rate estimates for a 30 year-fixed
$150,000 home mortgage:
FICO
Score |
Interest
Rate |
Monthly
Payment |
| 720-850 |
5.59 % |
$860 |
| 700-719 |
5.71 % |
$872 |
| 675-699 |
6.25 % |
$924 |
| 620-674 |
7.40 % |
$1,039 |
| 560-619 |
8.53 % |
$1,157 |
| 500-559 |
9.29 % |
$1,238 |
Virtue may not always be its own reward, but a $378 spread between good credit
and not-so-good is serious business. It is a spread that can torpedo a lot of
home-owning dreams and should motivate anyone in the market for credit to consider
what a good score can do for them and how a bad score socks it to them.
Improving a credit score is not a short term activity. In any given
three-month period, according to FICO, only one in four debtors has a 20 point
change in score (positive or negative we presume.) And forget about those emails
and websites that promise to restore credit virginity overnight. That is a process
that can take a long, long time and over which a borrower has minimal control.
The Federal Trade Commission offers some good suggestions for the long term
rehabilitation of the credit-score deficient.
First of all, if you have no credit, establish some. Apply for a credit card
and use it ' wisely. Charge a little bit every month, even if it has to
be gas or groceries, and pay off the bill immediately. If you have no established
credit you may have to pay a fee to the credit card company, but consider it
an essential cost. Once you have been a good customer for a year or two you
can probably convince the company to remove the fee. If not, apply for a new
card elsewhere. And, if you are establishing credit, don't open a lot
of new accounts. A single credit card and maybe a retail charge account will
get you started.
If you have established credit, treat it like a crown jewel. Pay every bill
on time!!!!! If you are already behind in payments, catch up immediately or
call the account holder and make arrangements to do so, and then keep that account
current for ever after. Even a '30 day late' on your credit report
will come back to haunt you.
Keep balances low. A borrower 'maxed out' on one or more lines
of credit will raise a lot of questions about his financial stability and this
will be reflected in credit scores.
If you are shopping for a loan, do so in a short time frame. Credit scoring
distinguishes between someone searching for a single loan and someone who is
always on a credit hunt based on the time fame in which inquiries appear on
your credit report.
And, most important, check your credit report several times a year to make
sure the info is correct. Soon everyone in the country will be entitled to one
free credit report from each of the three reporting agencies each year. Stagger
requests to these companies and you can review your status every four months.
Email me if you need help doing this.