The
basic concept of scoring a credit report is good, but the problem is the
credit reporting system isn't perfect and, unfortunately, there is not a
legally mandated format that all creditors must use when reporting. As a
matter of fact, there is no requirement for creditors to report at all!
It
may not seem fair, but in this litigious society and with the constant scrutiny
over discrimination there has to be a common guideline, or equalizer, that
cuts across all levels & applies to everyone which regulators can point
a finger to and say "This person was turned down because . . ."
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The
use of Credit scores by lenders came about, mostly, because of discrimination
concerns. Originally credit scores were developed by the credit bureaus
as a way to make money by selling lists of the names of people who were
likely candidates to take out more credit.
The
bureaus could not let unauthorized people look at your credit, but they
could sort and give them the names of the people who met a lender's profile.
(This is where all those unsolicited "pre approved" credit cards
come from.) The credit scores simply standardized common lender profiles.
Credit scores are generally known as FICO scores after the company that
calculates the scores for Experian just as you say you want a Kleenex™
when you want a tissue.
The
problem with this system is that people who paid their bills off monthly
and were frugal with their credit had lower scores than the credit abusers
and people who pay cash simply don't exist. The credit scoring system has
been massaged and improved over the years, but it is still the number one
complaint mortgage companies have about the approval process.
Credit
scores do not take into consideration stability factors, they do not know
your debt/income ratio, they don't know about raises or the divorce, but
if you want a standard Conforming (FNMA/FHLMC) loan you must have at least
a 620 score for an underwriter to even consider your loan request. If you
have lower than a 620 score there is alternative financing available, but
usually at "alternative" rates!
Each
Credit Bureau has different scoring criteria, but theoretically
credit scores range from 0 to almost 1,000. Practically most
scores fall between 520-700 at all 3 bureaus. I have never seen a score
higher than 835, although I know higher scores exist, and I have the
unique distinction of having the lowest score ever recorded in the U.S.
Erroneous information drove my score down to 135. In less than 2 weeks
I raised my score by over 600 points (to 750+) by simply correcting
the mistakes. They say that if you are alive and breathing it is impossible
to have a score lower than 400 so I guess I was in an alternate universe
for a while.
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There
seem to be several different scoring levels to cross. These
are definitely not absolutes and I list them only to give you an idea
of the impact credit scores can make. Your other strengths can modify
this list.
<580
= "B" loan
580+ = A minus or FHA loans
620ish = minimum for normal interest rate
680 = no income verification loans
700 = 100% financing + no income and no asset verification loans
750-800+ = whatever loan you want at the lowest rates available.
It
is important that you have as high a score as you deserve. An artificially
low score, even if your score is above 620, can impact how carefully an
underwriter scrutinizes your situation. It can also affect the loan type
and even the interest rate you can secure.
The
basic premise is the higher the credit score the better the rate or,
alternatively, the less documentation required. I would find no fault
with that system IF the credit scores were accurate. After all, why
should a person who never pays their bills on time and has no savings
get as low a downpayment and interest rate as someone who has never
been late and is a good manager of their debts and money?
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