FICO Score System

From the Desk of Jonathan Cherry 1:30pm cst 1/26/12

Lenders use different scoring models; however the FICO score model is the most used scoring method. The credit score scale has a range from 300 to 850. The higher the number the better the credit rating, and the majority of people with a FICO score statically range from 600 to 800. A score over 720 will typically put you close to the best interest rate pricing; however in the mortgage industry 760 is the typical top tear for interest rate pricing in most scenarios. Keep in mind other factors like loan to value, and loan scenarios apply as well. This data comes from FICO (Fair Isaac Corporation) a California based company that developed the first credit score as well as the FICO score.

Presently each of the three major credit bureaus Transunion, Experian, and Equifax has their own version of the FICO scoring system. Equifax uses the BEACON score, Experian utilizes the Fair Isaac Risk Model, and TransUnion uses the EMPIRICA score. Which answers one of the top questions we get in the lending industry; “Why my three FICO are scores different?” The reason for this is each scoring system uses a different algorithm to generate a credit score which causes a variance between the three scores. This is also why we use the middle of the three scores in the mortgage industry.

Another common question we get is; “If I add a cosigner with a better score with this help the interest rate?” No, not in the mortgage industry when using a co applicant we use the lowest middle score between the borrowers on the loan.

Is the scoring system going to change? It could this depends on whether a new credit scoring model catches on. It is called VantageScore. The three major credit reporting bureaus have collaborated on this model and it will use the same scoring algorithm to compute the score. Consumers can currently order their VantageScores through Experian’s web site for $6. This scoring system has a range of 501 to 990 with a letter grade as well ranging from A to F. This means a score of 501 to 600 would receive an F, and a score of 901 to 990 would receive an A. The same as it was in School.

This new scoring system may not take off or will take time for lenders to adopt due to the current underwriting computer programs, and current policies that would have to change for this to take effect. Regardless whether it changes rates and products will still be graded based of the risk the scores produce.

In conclusion your credit score is a powerful number when it comes to obtaining traditional financing with favorable terms, and rates. Again over the next week I will be doing a daily blog on credit. Remember it is important to check your report to make sure correct information is being reported, and to know what adjustments need to be made in order to increase your FICO score. Thanks Jonathan Cherry