Thosewith less than excellent credit face higher interest rates, shorterterms and larger down payments, a credit calculus made possible byFICO.
The Fair Isaac CorporationFICOis a publicly traded company thatcompiles and provides consumer credit scores. The scores rangefrom 300 (poor) to 850 (perfect), and largely determine who qualifiesfor a loan and at what terms.
Just six months ago a FICO score as lowas 630 was considered excellent, and entitled you to the same terms asa person with a 760 score. Loans made to those with lower scores weredubbed “subprime” by the media and, in the days of low interest rates,were easily secured.
But those days are gone. Today’s subprimeborrowers are shut out of the lending market, though some buyers maysecure a government guaranteed loan. “The requirements these days aremore strict,” said Doug Lenski, owner of Wholesale Mortgage Services ofWisconsin. “Today, a borrower with a 630 score may need to pay three points to get the same rate as the 740 borrower.”
Inmortgage-speak, a point is equal to 1% of the total loan value.
Lenskisaid mortgage lenders recently began using a tiered ranking system,based on FICO scores in 20-point increments. “A 740 score, along with20% down, will get you the very best terms,” Lenski said. “Nothing hasreally changed for those with good credit.”
A score of 720 to 739 will result in a slightly higher rate. Score 700 to 719 and your rate bumps up another notch. “Ifthe borrower with the 740 score is paying 5.5%, then another borrowerwith a 640 could be paying 6.5%,” Lenski said.
Your credit score alsofollows you into the car showroom, where a 100-point spread willdetermine your interest rate, the length of the loan and how much moneyyou need to put down for your wheels. “A borrower with a 640score might be required to pay a 50% down payment to secure the loan,and the term might be cut from 65 months to 60,” said Dan Drinkwine,finance manager for Hall Chevrolet.
Drinkwine characterizescredit scores over 700 as an A, 670 to 700 as a B, and 640 to 670 as aC. The median credit score in the United Statesis about 700, meaning half of consumers have scores above that number,and half below. “We can finance a car for a C,” he said.
KathrynCrumpton, manager at Consumer Credit Counseling Service of GreaterMilwaukee, said knowing one’s credit score has always been important,“but especially so now with changes in the credit market, and theoverall downturn in the economy.”
Still, many if not mostpeople aren’t familiar with FICO scoring, much less their own creditreport. “When I give talks around the community, I’ll ask a roomful ofpeople how many know their own scores,” Crumpton said. “About halfraise their hands.”
The next New Economy will be published in the Dec. 25 issue of the Shepherd.
Definition of the Week
Keynesian: Abranch of economics, based, often loosely, on the ideas of John MaynardKeynes, characterized by a belief in active government and suspicion ofmarket outcomes. (Source: Economist.com)
